Ukraine crisis major variable affecting U.S. economy

Federal Reserve Chairman Jerome Powell submitted the Semiannual Monetary Policy Report to the U.S. Congress on March 2.

In the report, Powell said that the impact of the Ukraine crisis on the U.S. economy is highly uncertain, and the Fed will closely monitor the situation. Powell said the U.S. economy had achieved strong growth in 2021 thanks to widespread vaccination, the reopening of the economy, the support of fiscal and monetary policies, and the sound financial position of households and businesses.

He also said that economic activity had slowed in 2022 as a result of the rapid spread of the Omicron variant, but the slowdown is likely to be temporary.

In fact, the U.S. economy faces two main problems in the near term. One is a tight labor market, with a severe shortage of labor supply compared with strong demand and wages rising at the fastest pace in years. The second is a sharp rise in inflation, as bottlenecks and disruptions on the supply side limit follow-up production, resulting in a general increase in the prices of goods and services.

So, in terms of monetary policy, Powell said the Fed is phasing out its net asset purchases and is expected to raise the target range for the federal funds rate at its meeting later in March. Balance sheet reduction will also follow after the start of the rate hike process. The Fed expects inflation to decline as the effects of fiscal support wane and loose monetary policy is removed, and as the supply bottlenecks ease and demand slows.

For the U.S., the COVID-19 pandemic and the uncertainty of the Russia-Ukraine conflict are major variables affecting its economic prospects and policy responses.

On the latter, in particular, the consequences of the conflict and the depth and breadth of sanctions imposed by the U.S. and its allies on Russia could affect the U.S. economy and the world economy far beyond the Fed's control. To minimize the impact of geopolitical risks, China should urge all sides to seek a solution of the crisis through negotiation, and support all constructive international efforts conducive to a political settlement of it.