“Imminent Attack” Warnings Weigh On Markets

Geopolitical tensions are high over a potential incursion/attack on Ukraine by Russian forces. A massive humanitarian cost is being predicted based on estimates of casualties and displaced refugees. Financial markets are on edge, stock prices are dropping while bond yields remain fairly steady. The immediate effect of an escalating conflict in Ukraine will be a spike in energy prices. Supply chains already under stress will suffer further disruption. These factors will further exacerbate and lengthen inflation worldwide. The Federal Reserve is now expected to raise rates steadily throughout 2022. There are 7 meetings remaining in 2022 (March, May, June, July, September, November, December). Markets are expecting a quarter point increase at each meeting. Expectations of a half point increase in March are ebbing due to the increased uncertainty in the Russia/Ukraine situation. The futures market indicates 70% chance of a quarter point and 30% chance of a half point. Seven rate increases would bring the Fed rate to 2.00%, close to the 2.25-2.75% predicted “neutral rate” that policymakers feel would be appropriate for “normal” economic conditions (which has not been reached in well over a decade) Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners