New York (CNN Business)The Federal Reserve is going to try to hike interest rates without pushing the world's biggest economy into recession. Russia's war in Ukraine will make its balancing act more difficult.
With inflation running near 8%, the US central bank can't afford to wait any longer to start raise rates from near zero. That's true even though a major armed conflict has erupted in Europe, sending energy prices through the roof and damaging economies around the world.
Hiking rates while ensuring the economy continues to expand is the latest challenge for Fed officials who have spent the past two years navigating coronavirus shutdowns and the worst labor market shock in history.
Federal Reserve Chairman Jerome Powell has warned that the war could stoke inflation and cause households to cut back on spending. But he has also indicated that the conflict has not changed the central bank's thinking on interest rates.
"To ensure that the economy continues to expand and avoid recession, I do think that it's important to normalize interest rates," Moody's Analytics chief economist Mark Zandi told the House Financial Services Committee on Tuesday.
Almost all investors expect the Fed to increase rates by 0.25 percentage points at its meeting on Wednesday, according to the CME's FedWatch Tool. It will be the first rate hike since late 2018, but not the super-sized half point increase that was on the cards before Russia's invasion.
"The key thing for lower and middle-income households is to avoid recession," Zandi said.
That is easier said than done. Goldman Sachs (GS) economists said last week that the chance of a recession in the United States over the next year has risen as high as 35%. The investment bank sees little to no growth during the first three months of 2022.
Lower income households already struggling with high prices would be hit hard by a downturn.
The pandemic inflation trend began with products and services that were linked to high demand and supply chain disruption, such as cars. But higher prices soon spread throughout the economy. In the year ended in February, US consumer prices rose 7.9% without seasonal adjustments, the Bureau of Labor Statistics reported Thursday. It was the biggest increase since January 1982.
With prices for food and gas rising swiftly, the Fed has no choice but to act.
Rich Russians turning to Dubai to evade sanctions
Wealthy Russians have stepped up their efforts to move their funds from Europe to Dubai to evade Western sanctions placed on them over the war in Ukraine, Reuters has reported, citing financial and legal sources in the Gulf state.
A globally acclaimed tourist destination, Dubai is also considered the region’s business hub. The United Arab Emirates’ recent refusal to condemn Russia’s military operation in Ukraine at the United Nations Security Council appears to have been interpreted by Russia’s rich as an invitation.
According to Reuters’ sources, Russian citizens have been moving their funds from Switzerland and the UK to Dubai, after the former two nations sanctioned Russia and threatened to freeze the assets of prominent Russian businesspeople and politicians.
An unnamed lawyer based in Dubai told the outlet his firm had received a number of enquiries from Russian entities about shifting “very significant funds” to Dubai. Several reportedly involved hundreds of millions of US dollars.
Another source, a senior private banker, said Russian customers with accounts at private banks elsewhere were opening accounts with the same bank’s UAE branch or with local banks. They noted that the number of Russian customers had recently increased. Other sources said they had seen a recent growth in Russian investments in the region’s real estate.
Analysts say the UAE, and Dubai in particular, is a convenient location, being only a few hours’ flight from Russia and not having regulators answerable to Western states. It has also been very popular with Russian tourists over the past several years, with Russians being among the most numerous visitors and buyers of property in the emirate.
While Russian funds in Dubai are not yet subject to Western sanctions, bank sources say there is a risk of reputational harm to the region’s financial institutions that continue working with Russia while many foreign corporations are cutting ties with the country.
When asked for comment on Russian money flows to the region, the central bank, the Government of Dubai Media Office, and the UAE Foreign Ministry did not immediately respond.
Meanwhile, the Financial Action Task Force, a Paris-based global financial crime watchdog, last week put the UAE on its “grey list” of countries that are subject to increased monitoring. A source told Reuters this means the country’s banks will have to proceed with caution when it comes to welcoming Russian money if they wish to avoid EU penalties themselves.