All eyes are now on the geopolitical conflict between the West and Russia that is unfolding in Ukraine. Nobody will deny that all the parties involved have already suffered from it. In Russia, stocks and the national currency plunged. The country has faced Western sanctions, and the plug might be pulled on Nord Stream 2 for good. The West has seen its stock market plummet as well, and natural gas prices in the eurozone may skyrocket again. Meanwhile, Ukraine is balancing on the verge of a fully-fledged war. Above all else, macroeconomic factors are also weighing on investors' sentiment.
A couple of months ago, the US Federal Reserve was expected to hike interest rates 3-4 times in 2022. Later, amid growing expectations of monetary policy tightening, markets suggested there would be 7 rate hikes at each meeting this year. Moreover, experts assume the interest rate will be immediately raised 0.5% in March. At the same time, some analysts reckon that even a 1% or even 1.5% increase will not be enough to bring inflation to the 2% target. It has accelerated significantly over the year. So, it may now take even more time for inflation to return to the target level. In addition, excessive money supply, the imbalance between demand and supply, and high energy prices are weighing on consumer inflation. Moreover, in the face of a possible war in Western Europe, energy prices may skyrocket further. Although the COVID-19 pandemic has recently receded into the background, the supply chain issue did not go anywhere. Demand is exceeding supply, and prices are rising on their own - that is double or even triple inflation. Meanwhile, the Fed has just one monetary policy tool to control the level of inflation - through rate hikes. No doubt, the regulator will use it since strong GDP allows the Fed to cool down the economy.
However, the higher the inflation, the more aggressive the Fed should be. JPMorgan expects the US central bank to raise interest rates by 0.25% nine times at each meeting throughout 2022 and at the first two meetings in 2023. The bank's experts say inflation will unlikely slow down any time soon, so the Fed will have to take emergency measures. Chicago Fed President Charles Evans asserts monetary policy as it stands is "not well-positioned" and needs to be adjusted. So, the Fed will highly likely adopt a more aggressive stance on monetary policy.
