Dave Donabedian, CFA

March 28, 2022

The Russia/Ukraine conflict is likely to complicate the Fed’s mission.


In our annual outlook published at the beginning of January, the CIBC Asset Allocation Committee projected: “The Fed’s policy pivot, fluctuating COVID trends, and multiple tense geopolitical issues suggest higher stock market volatility this year.” While that has proven to be true, it could also be argued that we were masters of understatement. At this writing, the S&P 500 is down approximately 4.7% year-to-date. The yield on the 10-year Treasury note jumped from 1.50% to 2.47%, and the Bloomberg Commodity Index has risen 31%.

It would be tempting to attribute all of these sharp market moves to Russia’s invasion of Ukraine. While it is a geopolitical earthquake, war in Europe has not been the exclusive catalyst for volatility. Indeed, we don’t believe the Russia/Ukraine conflict has even been the primary driver of price action in the stock market. As the chart below illustrates, equities were weakest before the invasion, and are actually up since the invasion.

Markets have a long history of doing the unexpected in reaction to geopolitical shocks. As we chronicled previously, markets tend to be resilient in the face of such shocks over time. Furthermore, we believe financial markets have been more afraid of Federal Reserve Chair Jerome Powell than Vladimir Putin, at least so far.

Last year, as inflation shot higher, the Federal Reserve (Fed) initially dismissed it as “transitory”—a mere blip that would normalize in short order. But the inflation rate persisted and even accelerated as 2021 progressed, and Powell eventually conceded in December that the word transitory needed to be retired.

This concession, along with the lack of a specific policy response to the highest inflation in 40 years, created nervousness that the central bank was behind the curve. We believe this was the primary reason for market weakness in the early weeks of the year prior to Russia’s aggression.

At its mid-March meeting, the Federal Reserve finally eliminated its perceived ambivalence and came down firmly on the side of arresting inflation as its primary goal. The Federal Open Market Committee (FOMC) implemented its first rate hike since 2018 and projected a likely path of policy rate increases at each of its six meetings this year, with further hikes projected next year (see Chart 2).


The Russia/Ukraine conflict is likely to complicate the Fed’s mission. That is because the jolt to commodity prices that has resulted will likely lead to even more inflation in the short term, and potentially weaker economic growth in the medium term. While we don’t believe current conditions point to a recession in the US, the Fed’s margin for error is shrinking. This would be especially true if the Ukraine conflict escalates and lasts many months.

The path of the Russia/Ukraine conflict is a “known unknown”- we know it is a potential wild card, but we can’t forecast the outcome. Even the direct combatants don’t know how it will all end. Aside from news flow, we’ll be focusing on the following fundamentals to chart the course forward:

  • The direction of commodity prices;
  • Trends in inflation, aside from the commodities impact;
  • Strength in the job market;
  • Further changes to monetary policy by the Fed;
  • The level of bond yields and shape of the yield curve; and
  • The path of earnings revisions for US companies.

This is unquestionably a period of elevated uncertainty in financial markets. In the weeks and months ahead, we’ll be following these objective measures to assess whether the outlook is likely to shift materially. In the meantime, it is more important than ever to own assets characterized by diversification and high quality, including options that are likely to hedge against the risks of persistently high inflation.


We will continue to monitor and keep investors apprised of the evolving economic situation and Russia/Ukraine conflict. If you have any questions, please contact a member of your CIBC Private Wealth team.