All of this brings us to the US central bank and the unenviable situation it finds itself in at present.

We typically say that, if you want to know what markets will do in the near future, ask yourself what the Fed is and will be doing and act accordingly.

There are a few exceptions to this rule. A major land war in Europe qualifies.

Nonetheless, the Federal Reserve is at a critical juncture for a few reasons and we need to start by looking at the next two weeks leading up to their next meeting.

• First up is the reality that next week will be the end of the US Federal Reserve's latest quantitative easing program.

Every month since early on in the pandemic, the central bank has bought various types of bonds on the open market.

That program will be finally coming to an end. Despite all the talk over hiking and how many times and how quickly, it is somewhat forgotten that the US Federal Reserve BOUGHT $20 billion of US government and mortgage bonds over the last calendar month.

This is pretty bizarre.

• Next up is the fact that, in an unintentional yet ironic outcome, the day the quantitative easing program will end will also be the new US inflation data release.

The CPI print will come out and it could begin with an "8" as in 8%+ inflation. It could even be higher. Whisper it quietly: What if it is 10%+?

So, if that was not on your radar and you thought the war in Ukrainian war was creating a lot of volatility, be aware.

Lastly, the Federal Reserve will have a meeting the weekend after that.

• The war has put paid to the notion that the Fed would hike "twice" or raise US interest rates by two 0.25% hikes or simply: 0.50%.

But in many ways it has raised the level of difficulty for the central bank considerably.

The reason?

Well previously you had a very strong economy and also strong inflation. The key was to lower the latter while protecting the former.

Now the situation is clearly very different. A major land war on the world's second largest economic bloc and one that comes with exponentially rising commodity costs raises not just the threat of a very weak global economy but also, of course, the contagion of that conflict.

This is central banking on "hard mode" if there ever was.

Jay Powell and the other members of his committee will be changing their tune and will be furiously hoping that these commodity spikes prove short lived and they can safely hike US interest rates without the US economy tipping over recession.

The signs so far are not great for the commodity price angle. This war does not look like it will be over any time soon.

The recession angle is still a big question mark. For now.

What is clear that is that Jay Powell hates to hike interest rates into large amounts of economic uncertainty.

Finally:

In the early 1980s, Paul Volcker famously put the economy in recession to be able to control inflation. Almost overnight, that scenario has gone from being far fetched to the cusp of being very possible.

It is crazy enough to think it let alone write it but here we are.

For the March meeting the double hike (50 basis points or .50%) is off the table. The central bank will very probably hike by 0.25%. But thereafter the trajectory is very uncertain.

A lot will depend on the war and especially its medium term impact on commodities and especially energy.

This chart will likely be on many of the FOMC's minds:

From being behind, the being between a rock and a hard place, to now staring at an unprecedented scenario of a major war, high inflation and a dramatic re-ordering of the global economy and the international monetary system.

Here we are!

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