“Fed Raises Interest Rates For the First Time Since 2018”

Wednesday, March 16, 2022, the Federal Reserve announced short term interest rates would be raised by 25 basis points or .25%. This now brings the Federal Funds Rate to between .25%-.5%. Since inflation is currently so high, the Federal Reserve is hoping that this increase in the interest rate will lower the high demand our economy is currently facing, which will help lower prices and in turn, lower inflation.

In addition to this, projections from the Federal Open Market Committee are signaling that interest rates will continue to be increased up to six more times in 2022, which would bring interest rates to around 1.75% higher at the end of 2022 compared to the end of 2021. Because of the current instability in the economy, caused partially by the war in Ukraine and already high inflation at home, this policy is more aggressive than previously considered by the Fed, who in December only projected three rate hikes in 2022, instead of its current projection of six. 

The Fed now projects that inflation will be around 4.3% for 2022, which is higher than previously projected in December (2.6%). In 2023, the Fed predicts inflation to be around 2.7%, and to be 2.3% in 2024, meaning that the Fed expects the rapid inflation we are currently experiencing to slow down over the coming months and years. In order to reach these goals, the Federal Open Market Committee is expecting short term interest rates to be around 2.5%-3% by the end of 2024. 

https://finance.yahoo.com/news/fed-fomc-monetary-policy-decision-march-2022-131719859.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAF_baH9EOX4LipLA10R1ZnkA86BEFv7Vh1ggc0aRV3RnUn_NVjhaT_AsJefF_vfIGOJio-zhcGcRCXKsYd82tS-MQ84PUFD4UU5HGyoo81RDV984kUbh4vt7S4K-Xb-2fptzrny5AhScY_Ivkiu4vL_NAeldpPztUiUHBIpKhuPW

Ukrainian Refugee Crisis and it's costs to European Nations

     Europe is facing a growing refugee crisis on a scale that hasn't been seem since World War 2. Over the past three weeks alone nearly 3 million Ukrainians have fled into nearby European countries because of the Russian invasion of Ukraine. However few Ukrainians are willing to call themselves "Refugees", viewing themselves rather as people seeking temporary shelter, with plans to return to Ukraine either soon, or when the conflict is over entirely. For example, from a report coming from the Romanian government out of 431,000 Ukrainians that have entered Romania since the start of the conflict, only 3,800 have asked for asylum. This could be likely to Europe's recent dealings with asylum seeking refugees and the negative connotations that have formed around the word. Or that most Ukrainians fleeing Ukraine have some sort of skill that can be used to work in the countries that Ukrainians are fleeing too. 

    The economic impact that this crisis will have on the European Union might be catastrophic, at least initially, as seen in the 2015 refugee crisis that saw Europe take in 1.3 million refugees from the middle east. The European Union has already pledged $550 million USD in humanitarian aid for those fleeing the crisis, but experts have estimated that it might take $30 billion USD for the first year alone, to help those fleeing the crisis have food, shelter, and other living arrangements. Dealing with this crisis is going to be a staggering task for the European Union, already strained by the pandemic, supply chain issues, and high inflation.

    Inflation in European Union, or Eurozone is 5.8%, and with the increased and forecasted spending needed to deal with this refugee crisis, inflation is expected to rise to 7%.  Inflation is not the only economic worry, as the labor force might be significantly impacted by the influx of Ukrainian workers. The level of education in the Ukraine is similar to some of the host countries that refugees are fleeing into. It is important to note that a large amount of refugees are going to areas of other countries where they have a network of friends and family that can help them integrate into the local economy. Ukrainian refugees also have a record of previous employment to help them land jobs in their settled area. 

    The labor force is sure to be impacted, as impacts are already being reported. Hard to fill jobs like low paying service workers, and home assistants are already being filled. And the labor market for skilled jobs is becoming more competitive as the supply of labor is increasing. While this problem has not been reported yet, we have analyzed the affect of a higher supply of workers has on a job market, and lower wages are a result of it. The article does not address this directly, but does note that Governments should jump on the crisis quickly before political and social backlash follow the sharp changes caused by the refugees. Only time will tell how long the refugees will be in the eurozone for, or how they will integrate into their new environments.

https://www.nytimes.com/2022/03/16/business/economy/ukraine-refugee-crisis-europe-economy.html

 

Beyond the pump: Record gas prices are pushing up everyday costs, dampening economic recovery

 With the recent invasion of Ukraine by Russia many of the NATO members, including the United States have decided to support Ukraine through economic sanctions to avoid any physical implications as much as possible. tithe United States targeted the Russian central bank, mostly through freezing their assets. This caused the ruble to drop 30% relative to the United States dollar. In an effort to mitigate the damage of these sanctions the Russian central bank doubles interest rate to bring in more investment. Russia has a $640 billion stock pile of cash and at least half of that was frozen. This is causing a lot of unrest in the Russian public leading everyone to try to withdraw their money all at once which could have even worse impacts on the economy in Russia. One of the major implications is the price of imports in Russia is soaring which will lower the standard of living. Russia has been preparing for instances such as this by making a lot of their food production domestic, but the farmers that produce this food most likely won’t be able to get new equipment or fix old equipment which could make the measures taken by Russia virtually useless. China could offer support to Russia by letting Russia sell all of their exports to them but they haven’t done so showing that maybe the alliance isn’t very strong.

Economic Impacts of Current COVID Outbreak in China- Worst one since 2020

 A number of China's most popular areas have put back into place business and travel restrictions that were initially lifted in response to cases doubling today, March 15th.  This surge of the Omicron variant serves as the country's worst outbreak since 2020, which is saying something about the severity.

The biggest worry about these re-implemented restrictions is obviously the fact that China's massive economy will slow down and add to the struggles of the ongoing supply-chain issues.  The outbreak is happening at a horrible time, given the fact that the Ukrainian crisis is also in full swing.  Life is becoming increasingly more expensive.

An article by the Washington Post shares comments by Russ Mould, saying that "Investors may have become too complacent over the risks of lockdowns returning once again."  Stockholders run the risk of having put too many eggs into the-pandemic-is-over basket, and may risk losing a lot of money to this outbreak and possibly more to come.  COVID-19 is not quite finished, it seems.

https://www.washingtonpost.com/business/2022/03/15/stocks-market-oil-russia-china-ukraine/

The Fed Hits the Housing-market Wall

Stagflation is a rare economic condition of persistent inflation but low or stagnant consumer demand due to several factors, such as a high unemployment rate. It is an unusual situation because inflation often occurs due to high demand. Stagflation is a condition of slow or stagnant economic growth, but prices continue rising without visible or valid reasons for the inflation. However, other factors can come into play that makes prices rise. A factor that may help explain such an unusual condition is the rare occurrence of disruptions in intricate supply chains. The housing market requires a lot of building materials, but materials may not come as ordered by homebuilders. Supply disruptions cause scarcities in lumber, roofing materials, paint, pipes, etc. Stagflation is a boon to current homeowners who see increases in their home values. The housing market is tight due to long pent-up demand from Covid.

Stagflation is a bane to homebuilders who cannot finish housing projects on time. It is also a curse to all potential homebuyers who have difficulty buying a new home due to rising prices. The Federal Reserve Board (the Fed) is in a grave dilemma. It is like being caught between the devil and the deep blue sea. It is an old saying indicating an awkward situation. The Fed has to choose between two equally unpleasant and unpalatable choices. It can raise bank interest rates to contain rising inflation and hope not to trigger a recession. Or the Fed can opt not to raise interest rates but end up hurting everybody, especially consumers. In a period of stagflation, the courses of action and monetary tools available to the Fed are limited. A policy increasing interest rates may work or may not work. There are no guarantees at all. The Fed is between two equally unpleasant courses of action for which it may get the blame.   

https://www.bloomberg.com/opinion/articles/2022-03-12/fed-s-inflation-fight-stymied-by-stagflation-in-housing-market