Putin's War Has Made Jay Powell's Job Easier

(Bloomberg Opinion) -- Some of the world's most important central banks are showing little sign of walking away from the gradual removal of stimulus after Vladimir Putin's attack on Ukraine. Higher interest rates are coming — maybe not as quickly or dramatically as speculated weeks ago, but they're coming nonetheless. Even the bare minimum increase will start to look bold.

Federal Reserve Chair Jerome Powell is likely to signal in testimony to Congress on Wednesday that inflation remains a big worry, though not enough to warrant a dramatic rate liftoff. Bloomberg Economics expects him to flag an initial quarter-point nudge. Two Bank of England officials conveyed Tuesday their support for tightening in some way later this month. An ECB policy maker voiced some caution about rushing to the exit, but still endorsed an ultimate move away from ultra-easy money. The Reserve Bank of Australia, expected to lift rates around mid-year, said little to change minds in its monthly decision Tuesday. In short, they're all more or less staying the course.

It's right to tread carefully when Russia's aggression has simultaneously sent oil prices soaring and curbed growth prospects. For central banks the stress is coming from both directions: The war in Ukraine is further evidence that elevated prices aren't transitory and could be damaging to growth. Forecasters at monetary authorities are likely still running scenarios on what Russia's invasion means. For their part, markets have withdrawn the bets on ever higher rates that characterized the past few months.

While the Fed's top leadership never endorsed the idea of at least one half-point move and hiking at every meeting in 2022, these two possibilities had become part of the narrative. The Fed was destined to be behind the curve, the BOE left things too late, Europe was hopelessly lagging behind, and so on. You don't hear much of that today, which means that incremental hikes — and not necessarily at every gathering — now look like the way forward. There's a lot more tolerance for proceeding with caution.

A quarter-point hike from the Federal Open Market Committee at its March 15-16 meeting, once seen as the least Powell could do in the face of the highest inflation in four decades, seems to be the most likely outcome. To a certain extent, central bankers have let markets do some of the work for them: Traders have abandoned bets on an unusually large Fed step, dismissed the likelihood of a half-point hike in the U.K. this month, and kicked the idea of action by the European Central Bank into next year.

Part of policy makers' newfound hawkish stature may just reflect that they're loath to shift their outlook quickly. Historically, it has taken an actual economic crisis — or the imminent danger of one — to change course. That was true in the 2008 financial crisis and, to a degree, in the pandemic.

What's different this time is accelerating inflation. The pace of price increases is far from contained, as it was in past moments of rapid pivot. The Fed's preferred gauge ran at 6.1% in January, more than three times its desired level over time. That reduces their room to maneuver.

Even if policy makers wanted to cut, their credibility would be greatly diminished, perhaps shredded. Inflation is well above target in Britain and the euro zone, as well. “Prompt tightening now could help limit the total scale of tightening that will be needed,” Michael Saunders, a member of the Bank of England's monetary policy committee, said in a speech Tuesday. He was careful to add that his remarks shouldn't be interpreted as advocating a half-point hike as he did in February. Separately, his colleague Catherine Mann warned of inflation becoming “embedded” in decisions of companies and workers. That's the central bank equivalent of a hazmat sign on a truck.

Central bankers will be careful to move methodically and not upset any apple carts — just as they've always planned. Putin has made such restraint look steadfast, an unintended consequence of his aggression.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.