- Even as the U.S. Federal Reserve is warning markets of more aggressive tightening measures, with possible balance sheet runoff as soon as May, the U.S. Treasury Department is warning that the ongoing Russian invasion of Ukraine will have serious economic repercussions for growth.
- With inflation in the U.S. running white hot, and prices increasing at the fastest pace in over four decades, there is mounting pressure on the Fed to do more to reign in prices.
America’s institutions are bets understood by their different roles and checks and balances on each other.
Whereas it is the role of the U.S. Treasury Department to spend money, it’s the U.S. Federal Reserve’s role to enact monetary policy for a strong economy with maximum employment.
While both roles may sound similar, their execution and ideology differ tremendously and there are growing signs that their views on the economic outlook are starting to diverge.
Even as the U.S. Federal Reserve is warning markets of more aggressive tightening measures, with possible balance sheet runoff as soon as May, the U.S. Treasury Department is warning that the ongoing Russian invasion of Ukraine will have serious economic repercussions for growth.
According to a copy of remarks to be made by U.S. Treasury Secretary Janet Yellen before the powerful House Financial Services Committee,
“Russia’s actions, including the atrocities committed against innocent Ukrainians in Bucha, are reprehensible, represent an unacceptable affront to the rules-based global order, and will have enormous economic repercussions for the world.”
The alleged war crimes committed by Russian forces in Ukraine are solidifying resolve by Western nations including the United States, to impose a fresh round of even harsher sanctions on Russia.
The U.S., European Union and Group of Seven industrial nations are coordinating new sanctions on Russia, including a U.S. ban on investment in the country and a ban on E.U. coal imports following discovery of the massacre of civilians by Russian forces in Ukraine.
At the same time, the International Monetary Fund is preparing to cut its global growth forecast from an expansion of 4.4% earlier this year.
Deutsche Bank economists said on Tuesday that they now expect a recession in the U.S. within the next two years, the first major bank to take this view.
In signs that the U.S. Treasury Department is growing increasingly concerned about the strength of the U.S. economy against such strong headwinds, Yellen appears to be hinting to policymakers at the Fed that now may not be the most appropriate time to dial back support for the economy.
To be fair, the Fed has the deck stacked against it.
With inflation in the U.S. running white hot, and prices increasing at the fastest pace in over four decades, there is mounting pressure on the Fed to do more to reign in prices.
More market observers are preparing for a 0.50% rate hike in May, while U.S. Federal Reserve Governor Lael Brainard said that they central bank could begin runoff of its massive US$9 trillion balance sheet as soon as next month.
These measures, against an increasingly uncertain economic backdrop and with growth slowing in China could potentially tip the scales in favor of recession, a risk that neither the Treasury nor the Fed would want to take.
But because rhetoric and resolve have swung to the other extreme, in favor of tightening at the Fed, this may be Yellen’s chance to appeal to a more moderate and deliberate course for monetary policy from the Fed.
