Markets Have a Thin Safety Net After Russia's Invasion of Ukraine

Central banks have been a powerful tool to steady the global economy in crises past. Their ability — and willingness — to do so now is constrained. The terrain is tougher and the costs of a rescue are higher.

The price Russia pays for its invasion of Ukraine, not to mention the fate of the global pandemic recovery, depends to a large degree on whether Western monetary authorities deploy their muscle and what they are prepared to sacrifice along the way. Less than a week ago, policy makers in most countries were talking about how fast to withdraw support, not how much would need to be extended. Do officials jettison the fight against the highest inflation in decades? Is there a way to stave off financial upheaval without resorting to Covid-era or post-Lehman responses?

Fears of a funding crisis are multiplying: The dollar surged Monday against almost every peer, with Treasuries rallying alongside gold. The Russian ruble sank as the U.S. and European Union aimed to isolate the country from capital by sanctioning the Bank of Russia. The Biden Administration banned U.S. people and companies from doing business with the Bank of Russia, the Russian National Wealth Fund and the Ministry of Finance. Speculation was high Monday that Western central banks will assemble some kind of backstop for the world, while simultaneously keeping pressure on Moscow.