War on Two Fronts: Ukraine and Inflation

An equities correction has been led by growth. Treasury yields and credit spreads are not echoing the risk-off mood. Tensions in Ukraine raise the specter of serious geopolitical risk, and are building a premium into oil prices, which in turn aggravate inflation concerns and the risk that the Fed will tighten too soon. Biden’s low approval polling makes him hungry for a win, which points to a face-saving appeasement of Russia. Risk-averse NATO will want to avoid both military options and painful sanctions. The Fed will have to talk hawkish at Wednesday’s FOMC because Powell hasn’t been confirmed in the Senate yet, and the GOP requires a strong anti-inflation stance. Powell will likely temper it by citing “international stresses.” By the March FOMC he will be reconfirmed and politically invulnerable. The Omicron case-wave will likely cause January and February jobs reports to be weak, and inflation and inflation expectations are already dropping. Clear of politics and with data weak, the Fed will not lift off in March.