By Jeff Berman, ThinkAdvisor
Although the Russia-Ukraine war stands to affect the economy and financial markets, the Federal Reserve’s potential reaction is potentially more concerning, according to Jeremy Siegel, senior investment strategy advisor at WisdomTree and professor of finance at the Wharton School of the University of Pennsylvania.
The war could hit the economy and markets in two big ways, he said.
One is on the price of oil and another is how sanctions on Russia could affect the finance system itself, he told viewers.
Although some people have compared the current U.S. oil situation to what the country experienced in the 1970s, the U.S. is far less reliant now on imported oil, he said.
Meanwhile, an “aggressive” move by President Vladimir Putin of Russia against one of the NATO countries would be a potential “black swan” event, he said.
Here are five implications of the crisis on investment strategies, according to Siegel:
1. The Russia-Ukraine crisis stands to raise the price of oil.
“I imagine the uncertainty is adding $5 to $10 per barrel to oil,” he said. Saudi Arabia does “have some capacity” and “they don’t want it to go too high [in price because] that just accelerates the move towards electric” vehicles, he told viewers. “There’s that sweet spot they like.”
Even before the war, however, “we all know that oil was in short supply and going up” in price, he pointed out. “Way before Ukraine, the experts that I talked to said it was going to hit $100” a barrel.
So “we can’t blame this all on Ukraine,” but the crisis “will add certainly a little extra layer there,” he predicted.
2. Financial sanctions on Russia could have broader effects.
The invasion has led to a rise in the price of Bitcoin, Siegel said, predicting the impact of the attack on Ukraine could extend further through the financial system.
The 10% increase in Bitcoin value on Monday was related to the U.S. Treasury Department’s new sanctions against Russia’s central bank, Siegel said.
Additionally, removing Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) secure financial messaging services system could affect the overall financial system, including when it comes to settlements, he predicted.
3. Worse crises could follow.
The Russia-Ukraine crisis raises additional “hyper” uncertainties, including the “possibility” that it could “incentivize [President Xi Jinping of China] to move onto Taiwan,” Siegel said.
From a standpoint of U.S. economic impact, such a move would be “far more serious” than the Ukraine attack, he told viewers, adding “Russia is not an economic giant.” But it’s too soon for Xi to make any moves based on what’s happening in Ukraine, Siegel predicted.
Putin attacking a NATO country would be a black swan event, but, despite his throwing around a warning about nuclear weapons, most experts seem to think he won’t wage war on a NATO country, Siegel said. But if he does, the U.S. would be pulled into another war, he said.
4. The Fed may use the war as an excuse to not tighten monetary policy.
“The Fed is far more important than Ukraine,” Siegel said, apparently meaning when it comes to U.S. economic impact.
“I am concerned that problems in Ukraine will be used by the Fed as an excuse not to tighten as much as I believe they must tighten to control inflation,” he said. “The Fed is so far behind the curve that not moving rapidly will be the third greatest policy mistake in the 110-year history of the Federal Reserve.”
The first big mistake was the Fed not acting during the Great Depression and “letting the banking system fail,” he said.
The second was using the Organization of Arab Petroleum Exporting Countries’ (OPEC) embargo of the 1970s, which raised oil prices, as an excuse “not to tighten and, in fact, they let the money supply increase to try to offset the contractionary forces of the embargo,” he said.
Similarly, the Fed should not get scared about tightening now due to rising energy prices, he added.
Fed Chair Jerome Powell may be signaling what his plans are next week, when he testifies before Congress, Siegel said.
5. Inflation will continue for the foreseeable future.
Siegel predicted that inflation will likely continue through 2023, adding he hoped it would ease up by 2024. The Fed has been moving much too slowly to significantly ease inflation this year, he added.
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