Russia's Ukraine incursion could complicate the Federal Reserve's interest rate decisions

 The Federal Reserve planned rate hikes to combat inflation might need rethinking as the upcoming conflict in Eastern Europe could impact energy prices. The tensions between Russia and Ukraine have led to concerns of higher oil prices should hostilities erupt, with experts estimating a 10 to 15 dollar price increase per barrel. High oil prices will likely increase the price of petroleum based goods, reduce supply due to higher input costs, and reduce demand. All this leads to a slower economic growth and leaves the Fed with a difficult choice when it come to interests rates over the next few quarters. Higher interest rates compounded by an oil shock could negatively impact growth. On the other hand if the Fed accounts for the possible oil price hike and lowers interest rate, inflation could become a bigger problem. A rate hike is almost certain in March but perhaps global events will influence will force a rethink of the magnitude of the rate hike.

https://www.cnbc.com/2022/02/22/russias-ukraine-incursion-could-complicate-the-federal-reserves-interest-rate-decisions.html

Factbox: Ukraine Crisis - Where will Putin stop?

 Putin is effectively sending a signal to the international community that the war may escalate. The game of interests between the United States and Russia and between Russia and the West over the Ukraine crisis has further escalated, releasing a signal that the conflict has escalated, the game of interests has escalated, and it may turn into a local war. This signal needs to be released, and it needs to be released explicitly.

After the release, further observations will be made on this issue. Because Russia recognizes the legitimate independence of these two countries, this does not mean that the international community recognizes it, the United Nations does not recognize it, and the Western-dominated society does not recognize it either. Rather than saying that Putin wants to re-integrate the two Ukrainian regions into the Russian territory, it is better to say that he has issued a diplomatic strategy. Now the Ukrainian crisis is intensifying, and on this basis, the West's suppression of Russia has increased, which includes military support from the West for Ukraine. Now Ukraine claims to be ready.

There are various indications that behind the conflict between Russia and Ukraine is the contradiction between Western society and Russia, and Ukraine is only regarded as a frontier position for the West to fight against Russia. The Minsk agreement stipulated that the two sides abide by the ceasefire agreement and accept the monitoring of the international community, and Ukraine has also assured Russia. The current Ukrainian government calls on the entire Western society to pay attention to the Russian-Ukrainian issue under the pretext of Russia's non-compliance with the Minsk Agreement. Ukraine also has a side worthy of understanding and support, because it has become a victim of geopolitical conflicts, and the victims are the ordinary people of Ukraine.

https://www.reuters.com/world/europe/ukraine-crisis-where-will-putin-stop-2022-02-22/

What Conflict in Ukraine Means for the Global Economy

 With Putin's recognition of two separatist territories yesterday, coupled with new sanctions imposed by the United States, conflict between Russia and Ukraine seems to be inevitable at this point. This has many wondering what the effect war will have on the global economy, with a particular focus on Russia. Although Russia has vast supplies of oil, gas, and other raw materials, as a global player the Russian economy is fairly weak. As stated by the authors of the article "Italy, with half the size and fewer natural resources, has an economy that is twice the size [of Russia's economy]. Poland exports more goods to the European Union than Russia." 

However, Russia's hold on the European gas market could mean higher gas prices, not only at the pump but in houses and factories. Europe gets almost 40% of its natural gas from Russia, explaining the German hesitance earlier in the crisis to cut off access to the Nord Stream 2 pipeline, although they have since changed their position. Additionally, Russia is the world's largest exporter of wheat, much of which goes to Turkey and Egypt - countries struggling with internal problems of their own.

When taken into context with the post-pandemic recovery, which still experiences supply chain issues along with rising inflation. The price of gas rising, for example, could through another wrench into the works. Metals like palladium, nickel, and aluminum have seen their prices rise as fears of losing Russian resources increase. The U.S. is attempting to counter this by increasing natural gas deliveries, for example, but this won't be enough to fully mitigate any effects of war.

The long run effects of conflict would be the most shocking. Some economists believe that sanctions will force Russia into the open arms of China, as the two nations signed a contract to build a new pipeline. Additionally, Europe will have to look for new markets. As Russia's largest trading partner, any conflict in Ukraine will impact the EU heavily.

https://www.nytimes.com/2022/02/21/business/economy/ukraine-russia-economy.html

Annual Security Talk in Germany

 Vice President Kamala Harris and the Secretary of the State Antony Blinken are in Germany for annual security talks with US allies. Vice president sope about the situation between Russian and Ukraine crisis. She says is it important for everyone to remain united. "Our work together has been and will continue to be about strengthening the ability to deter activity in terms of aggressive activity by Russia as it relates to Ukraine. Also, about our defense and resources and the commitment that we have". Kamala Harris will meet with Volodymyr Zelenskyy, the president of Ukraine. Petitions for this conference initially were not very high due to Covid-19. It is risky for president Zelenskyy to leave the country right now because there are enormous troops next to Ukraine's border. When the leader leaves the country, bad things happen. At the same time, it is risky for Kamala Harris to visit Ukraine for the same reason. Currently, the EU and the US are making decisions about Ukraine without them. The vice president's first meeting was with the NATO secretary, General Jens Stoltenberg. It emphasizes aliens trying to put forward Russian aggression, but as with any big group of people, countries have their own domestic interests. Every country sees the issue a little bit differently. Everybody seems to agree that there should be some sanctions, some countries think that sanctions should be announced right now. Why Russia is not being represented in this meeting? Russian delegation a little while ago opted not to come. It is now a surprise that they are not there. However, they could have attended the meeting in order to de-escalate the situation. 

“The Fed's Battle to Fight Inflation Could Cause More Pain than Higher Prices”

     Even though the current inflation rate is causing higher prices in the economy, raising interest rates and reining in the prices may actually cause even more pain in the economy, including an increase in job losses. Because inflation is currently at a 40 year high, many people are calling for the Fed to raise interest rates a half percent in March, but some economists are arguing that raising interest rates that high could actually hurt the people that the battle on rising prices is supposed to be helping. 

    Raising interest rates would have the effect of slowing down a very fast economy, but this slowdown would decrease the amount of job gains, and could actually lead to job losses for the lower income segment of the labor force. The economy currently has 2.5 million less jobs than it did before the pandemic, so employers still need to keep hiring to get our labor force back to where it was prior to the pandemic. This increase in interest rates would have an opposite of desired effect and could lead to more economic hardships for the people currently making the least amount of money in our labor force.

    Although raising the interest rates would most likely lead to more unemployment, most economists realize that the Fed does have to take some action to stop inflation. So, some economists are advocating for a quarter percent increase of the interest rate, instead of a half percent, to try and get the economy in a more normal and stable position without causing as many problems for workers as raising the interest rate even higher most likely would.

https://www.cnn.com/2022/02/16/economy/inflation-fight-pain/index.html

Overpayments on Unemployment Benefits

    
     During the pandemics, more and more people lost their job. At the beginning of the pandemic, states started to use a new federal benefit program created by the CARES to give out unemployment benefits. However, not every transaction was done correctly. Some people received more money than they should have. In an article from CNBC, Greg Iancurci writes how states can solve this problem.

    According to Iancurci, the problem occurred because of the quick changes of the pandemic, the program being newly created, the high number of claims, and applicants making mistakes when they applied for the financial aid. The CARES, however, does not offer states a safety valve to forgive the overpayments. Some states tried for households to pay the "extra" money back to the state. However, there is a problem with this plan, because most households have already spent that money. In May 2021, Labor Department officials made rules so that states could ignore the overpayments in certain situations if they wanted to. The Labor Department also asked the states to pay back the "extra" money that they collected from the households. Michele Evermore, an advisor for the unemployment insurance at the Labor Department, explains why they do not want households to have to pay the "extra" money back. She says: "Otherwise, potentially millions of claimants have been or will be issued overpayment notices that will cause them to make drastic decisions with regard to how to reimburse states with money they do not necessarily have." This guidance from the Labor Department is optional, so states do not have to follow this guidance. However, Iancurci points out that the money used for aids is federal and not state money.

    The certain situations where states can choose to waive the overpayments are when people did not respond correctly to application questions assessing the eligibility for the unemployment insurance, or when the state was at fault for the extra high payment. For example when the state miscalculated the amount of payment someone should receive.

https://www.cnbc.com/2022/02/07/labor-department-tries-to-stop-states-clawing-back-unemploymentbenefits.html?&qsearchterm=unemployment%20benefits

Rising International Inflation and Its Effect on Worker's Real Wages

 

Rising International Inflation Rates and Their Effects on Real Wages of Workers

During the past three years, the world economy has continued to produce significant increases in inflation rates. During the month of January, consumer price grew much more than expected in the United States, Britain, and Europe. Additionally, recent territorial tensions between Ukraine and Russia sent the price of oil to over ninety-six dollars a barrel, the highest market price it has reached since 2014. As a result, economies on both sides of the Atlantic Ocean have introduced some regulatory economic policies, particularly that of monetary tightening. While the primary reason for implementing these policies is the aforementioned sudden increase in inflation rates, another reason for this action comes in the form of public opinion, as many banking institutions have begun to worry their credibility in the eyes of the public has waned during this most recent period of economic instability and decline.

These occurrences have garnered the concern of policymakers, particularly in relation worker wage demands. One of the more dangerous effects of high inflation is that in some cases, it can cause an increase in worker wage demands, or the amount of money that workers feel they should be paid in comparison to prices, the economy, etc. If these two singularities begin to affect one another, it can create a scenario known as a wage-price spiral, where workers demand to be paid more because of rising prices. If allowed to escalate, a demand for higher wages can cause increases in other sectors of the economy such as inflation and price, hence the wage-price spiral.

Unfortunately, the group that suffers the most from this economic phenomenon is workers themselves, as they suffer disproportionately compared to corporations or businesses when it comes to changes in price. However, it is important to note that it does put the policymakers in charge of price and money supply in a precarious situation, as the idea of wages increasing too quickly can be politically divisive and cause negative reception from the labor force.

Source: https://www.economist.com/leaders/workers-have-the-most-to-lose-from-a-wage-price-spiral/21807722

Halt the Gas Tax?

     As the price of gas keeps climbing and climbing, hitting a national average of $3.49 per gallon, lawmakers look to policy to lower that price. Some lawmakers have proposed a halt on the gas tax until 2023 to give some relief to consumers who rely on gas in their everyday life. The gas tax is a levy imposed on the overall price per gallon of gas. While states have their own tax, the Federal Government has a 18.4 cent tax per gallon that some lawmakers have proposed putting on hiatus, in a newly proposed bill. 

    This would be the first change in the gas tax since 1993, and is being proposed to combat a 7.5% rise in the cost of living experienced in 2021. The bill itself would put the tax on hold, as well as authorize the allocation of other general funds to keep funding the Highway Trust Fund, previously funded by the federal and state gas taxes. 

    The bill is meeting some criticism however, with critics calling the bill "ineffective," and "short sighted".  The main issue critics have with the bill is that they think the effect the pause has on gas prices won't be as large as lawmakers think it will be. Saying that gas retailers "might" pass along some of the relief, but the majority would ultimately feed into inflation. Critics are worried this bill might make inflation worse as the revenue of the gas tax for 2022 is estimated to be around $20 Billion, something that the Government would miss out on if they halt the tax.

 https://www.marketwatch.com/story/would-a-federal-gas-tax-holiday-mean-lower-prices-at-the-pump-dont-bet-on-it-critics-say-11644951388

Ukraine seeks meeting with Russia within 48 hours to discuss build-up

 Dmytro Kuleba, Ukraine's foreign minister, claimed Russia has rejected official pleas to justify the army buildup. He stated that the "next step" would be to propose a discussion over the next 48 hours to discuss Russia's objectives in "transparent."

Despite the presence of 100,000 troops on Ukraine's borders, Russia has dismissed any ambitions to invade the country. However, several Western countries have cautioned that Russia is ready for armed intervention, with the US suggesting that it may start with aircraft airstrikes "at any time." 

Upwards of a dozen countries have encouraged their people to abandon Ukraine, and several have withdrawn diplomatic personnel from the country's capital. According to three sources, CBS News reports the US Is prepared to evacuate all of its employees in Kiev in the next 48 hours. Meanwhile, 

Ukraine's President Volodymyr Zelensky, which criticized the "panic" that certain accusations may cause, said he had seen no evidence that Russia was plotting an invasion in the next days. On Sunday, he chatted on the phone for nearly two hours with US Vice President Joe Biden. According to the White House, President Biden underlined the United States' commitment for Ukraine, and both leaders agreed on the "need of persuing diplomacy and deterrence."

The Fed

 According to the last data on inflation, it has become clear that the Fed's monetary policy is too expansionary. The Fed was late in ending quantitative easing and raising interest rates. In the fourth quarter of 2021, nominal spending increased at an annual rate of 14.3 percent. The quick growth in spending pushed inflation well above the Fed's two percent goal. One of the mistakes was the intensive focus on closing the "output gap" between actual real GDP and potential GDP, which is extremely difficult to estimate. Consequently, the Fed should focus on other economic variables such as nominal GDP. The nominal GDP growth rate of 4 percent is consistent with the Fed's 2 percent inflation goal. Market players pay close attention to Powell's, who is the chairman of the Fed, comments. Fed officials seem to assume that financial markets desire as predictable a path for interest rates as possible. However, markets want is the assurance of a stable outcome for the economy. It does no good to hold interest rates at zero for an excessive period if that causes the broader economy to overheat.