[S Fear Engulfs Global Economy] Fed and ECB... More Complex Central Bank Calculations

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed) [Photo by Reuters]

[Asia Economy New York=Special Correspondent Joselgina] As the Ukraine invasion situation is not expected to be resolved in the short term, the calculations of central banks around the world, including the U.S. Federal Reserve (Fed), have become more complicated. There is growing concern that additional sanctions by the Western bloc to stop Russia could turn the ‘inflation’ shock into a global ‘stagflation’ shock.

The Wall Street Journal (WSJ) reported on the 7th (local time) that the Fed and the European Central Bank (ECB), which have been signaling monetary tightening to curb inflation, may slow down again ahead of their regular meetings to decide monetary policy this month. This is because they need to reflect new risk factors such as soaring commodity prices, comprehensive financial sanctions, and the possibility of a ban on Russian crude oil exports.

WSJ stated, "Economists are now increasingly warning about the possibility of stagflation, where inflation surges amid low growth as in the 1970s," adding, "This complicates the work of central banks." The Fed, which serves as the world’s central bank, will hold its Federal Open Market Committee (FOMC) regular meeting on the 15th-16th, and the ECB will hold its monetary policy meeting on the 10th.

Christine Lagarde, President of the European Central Bank (ECB)
[Photo by EPA Yonhap News]

Concerns about stagflation inevitably represent a nightmare scenario for central banks. Attempting to lower inflation could inadvertently dampen economic recovery. However, if the pace of monetary policy normalization is slowed to avoid triggering a recession, it could further entrench stagflation. Professor Nouriel Roubini of New York University pointed out, "We have already seen this scenario twice during the oil shocks of 1973 and 1979."

The Fed has already effectively signaled a rate hike at this month’s FOMC. UBS predicted, "Chairman Powell is emphasizing that inflation concerns outweigh growth uncertainties caused by the Ukraine situation," adding, "With oil price increases pushing back the inflation peak, rate hikes could accelerate." The U.S. Consumer Price Index (CPI) for February, to be announced on the 10th, is expected to rise 7.8% year-on-year. This is higher than the 7.5% increase recorded in January, which was the highest since February 1982.

Especially considering that the Ukraine situation intensified from late February, there are growing concerns that the March CPI, to be announced in early April, could rise further due to the recent sharp increase in oil prices. Salman Ahmed, Head of Macro Strategy at Fidelini International, said, "Rising commodity prices will lead to high inflation and low growth," and added, "If the flow of physical goods from Russia is blocked within days or weeks, the risk of a full-scale recession in Europe and elsewhere could increase."

Europe, which is geographically close to Russia and highly dependent on energy, is evaluated to be facing an even greater monetary policy dilemma due to the Ukraine situation. According to Capital Economics, the economic growth rate of the Eurozone is expected to fall by up to 2 percentage points due to the Ukraine crisis. ING stated, "Disruptions in energy and raw material supplies will weigh on growth and keep inflation elevated for longer," adding, "The risk of stagflation is particularly greater in Europe."