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Lessons from the last war that rocked global markets


Oil prices spiked and stock markets swooned amid Russia’s invasion of Ukraine. Analysts warn that stock losses could worsen and commodity prices rise higher as the war intensifies.

A bigger worry may be this: Policymakers in the United States and Europe lack the same set of tools that helped repair the damage the last time a major war rocked global markets.

After Iraq massed forces along the Kuwaiti border in 1990, and then invaded on Aug. 2, the S&P 500 stock index fell 18% and oil prices doubled. One factor driving oil prices upward was concern that Iraqi dictator Saddam Hussein would invade Saudi Arabia next, and suddenly dominate Middle East oil supplies.

Markets began to calm as the United States started massing forces in the region. But the Federal Reserve helped, too. By the time Operation Desert Storm launched on Jan. 17, 1991, the Fed had cut short-term rates six times, from 8.25% to 6.75%. Six weeks after the start of the war, Allied Forces had expelled Iraqi forces from Kuwait and Saddam had accepted a humiliating cease-fire.

Stocks regained their losses before the war was even over. Oil prices fell back to pre-war levels by April. The Fed kept cutting rates, because of the mild, eight-month recession that began in July 1990. By 1992, the Fed had cut rates all the way down to 3%. The end of the war itself coincided with the beginning of a robust expansion that lasted a full decade.

There are obvious differences between the Ukraine-Russia war in 2022 and the Persian Gulf War in 1991. Ukraine is not a major oil producer, and while Russia is, the sanctions imposed on Russia so far by the United States and many allied nations don’t include energy products. Oil prices have risen by about $10 per barrel, or 10%, far short of the doubling seen in 1990. Ukraine is a major producer of some agricultural products, but it’s not crucial to global commerce the way Kuwait and Saudi Arabia were in 1990.

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Yet Russia’s invasion of Ukraine is as brazen as Saddam’s foray into Kuwait, and the most economically destabilizing major war since then. Russian President Vladimir Putin seems indifferent to the economic damage his gambit may cause, even to his own nation. And Putin could go a lot further, by holding back his own oil and gas supplies in response to sanctions, or sending troops even farther into Europe and threatening NATO members such as Romania or the Baltic states.

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A notable difference between now and then is the Federal Reserve’s maneuvering room. Beginning in 1990, the Fed cut interest rates by more than 5 percentage points, and it could have gone further. The Fed can’t do that now, because short-term rates are already near zero. As financial markets are fully aware, the Fed is almost certain to raise rates, not cut them, at its policymaking meeting in mid-March, having already signaled the end of an easing cycle that began in 2019 and intensified when COVID struck early in 2020.

The Fed has to raise rates because inflation has abruptly risen to 7.5% and will probably go higher still as higher energy prices ripple through the global economy. This was not as much of a problem for the Fed in 1990. Inflation back then was running around 4.5%, higher than the norms of the last 20 years but much lower than the ruinous inflation of the 1970s and early ‘80s, with inflation peaking at nearly 15% in 1980.

The Fed famously attacked inflation under Chairman Paul Volcker, starting in 1979, and by the mid-‘80s, the Fed had won. By 1990, inflation and interest rates were both relatively stable, which gave the Fed all the room it needed to cut rates by the time of the Gulf crisis in 1990.

With short-term rates close to 0 now, the best the Fed could do is pause its plan to raise rates, unless it decided to experiment with negative rates, which Fed Chair Jerome Powell has said the Fed has no interest in. The Fed now manages inflation and unemployment with quantitative easing and other complex tools it didn’t typically employ until the 2008 financial crash required added firepower. The Fed called upon many of those tools during the COVID downturn, but has signaled it’s time to wind those down, too.

Despite the outrage over Russia’s attack on an independent nation with a democratically elected government, it’s probably safe to say the Ukraine-Russia war probably won’t be as economically damaging as Saddam’s threat to Middle East oil supplies in 1990. So the Fed may be able to thread the needle and raise rates as expected, to tamp down inflation, while markets learn to live with Russia’s medieval militarism. But economists with long memories have been warning for years that super-low rates leave the Fed with dangerously little headroom to stimulate in an emergency. Maybe we’ll get lucky, and this won’t turn out to be that emergency.

Rick Newman is a columnist and author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.

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