By Ann Saphir and Lindsay Dunsmuir
(Reuters) – The Federal Reserve likely would have raised interest rates by half a percentage point last month to deal a more decisive blow to soaring U.S. inflation, but Russia’s invasion of Ukraine kept them from it, minutes of the central bank’s March meeting released Wednesday showed.
“Many participants noted that…they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting,” the minutes said. “In light of greater near-term uncertainty associated with Russia’s invasion of Ukraine, they judged that a 25 basis point increase would be appropriate at this meeting.”
Russia launched its large-scale invasion of Ukraine on Feb. 24, days after several Fed policymakers had shown an openness to a half percentage point move at the March meeting.
A week later Powell in an appearance before Congress called the burgeoning war a “game changer” and revealed he would support a smaller 25 basis point move, effectively telegraphing the Fed’s decision ahead of time and delivering some measure of policy certainty even as financial markets remained on edge from the war.
The minutes show that his view on a smaller increment was then widely shared by his colleagues, who duly decided to raise interest rates by a quarter of a percentage point, and signaled they would continue to raise rates through the year and into next.
“Looks like they delayed a 50-(basis) point increase because of the Russia-Ukraine conflict, which makes sense,” said Alan Lancz, president of Alan B. Lancz and Associates in Toledo, Ohio.
Primary among the Fed’s fears at the time was heightened uncertainty about the impact on the U.S. economy from the war and sanctions on Russia, which have driven up energy and food prices.
Since the meeting and as the war has dragged on with no clear end in sight, a number of Fed policymakers including Powell have noted that the primary risk from the conflict is further upward pressure on inflation, not a hit to U.S. economic growth, bolstering the need for bigger Fed rate hikes.
Market participants are betting that a half-point rate increase is still ahead, likely not just for the upcoming May meeting, but for June and July as well. A string of three 50-point increases would mark the sharpest increase in the fed funds rate since the early 1980s.
“Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified, the minutes said.
The Fed last raised rates by half a percentage point in 1995.
(Reporting by Ann Saphir and Lindsay Dunsmuir; Additional reporting by Caroline Valetkevitch in New York; Editing by)
