Fed being in a tight spot makes March FOMC something to watch

THE upcoming Federal Open Markets Committee (FOMC) meeting - the US Federal Reserve's second of the year - will be one of the most closely watched of the past 2 years, though not necessarily for the reasons that prevailed before Russia invaded Ukraine last week.

Prior to the invasion, the big questions were not whether the Fed would raise rates, but instead by how much and how often for the rest of 2022. This was because inflation was clearly a problem and swift action was needed to stifle it. The Russian aggression has now complicated matters. Most observers expect the resultant spike in energy prices to aggravate inflationary pressures, adding pressure on the Fed to raise rates. Yet another school of thought says the Fed might stay its hand in order not to destabilise markets already rocked from the uncertainty shrouding the Ukraine crisis.

The position in which the Fed finds itself now is unenviable. If it goes ahead and tightens, it could add unwanted market volatility. If it tightens too much, it could choke off a nascent economic recovery. By the same token though, the Fed has been criticised for maintaining last year that the clear signs of inflationary pressures were "transitory". It has also come under fire for dragging its feet in removing stimulus that, with the benefit of hindsight, was far too excessive, especially in conjunction with massive fiscal aid.