Oil prices could determine how markets react to Russia’s Ukraine

The heavy new round of sanctions on Russia by the U.S. and its allies are likely to push oil prices — and inflation — even higher.

That could create a bigger challenge for the Federal Reserve as it considers interest rate hikes, and add to tighter financial conditions in general. Economists see energy as a big driver of inflation, but if oil prices get high enough, they can choke the economy.

For now, the sanctions on Russia’s banking system by the U.S. and others do not appear to be resulting in broad stress in financial markets, even though it’s unclear how much Russian oil could ultimately be kept off the market.

Stocks were volatile Monday. The S&P 500 ended the day at 4,373.94, off just 0.2%, while the Nasdaq was higher at 13,751.40, up 0.4%.

Investors turned to the Treasury market, pushing the 10-year yield to 1.8%. The dollar was off the highs it reached in overnight trading, and gold was up about 1% as investors sought safer assets.

Oil prices jumped, with West Texas Intermediate crude futures settling 4.5% higher at $95.72 per barrel, while Brent international gained 2.7% to $100.55.

Russian assets sold off, and the ruble was down more than 20%. Even though the U.S. did not directly sanction Russian energy, strategists believe the measures will reduce the amount of Russian oil that flows onto the market. Moscow is one of the world’s largest energy producers, exporting about 5 million barrels a day. It is also a major exporter of natural gas, supplying more than a third of Europe’s gas.

“Whatever happens with oil will reverberate across all the other markets and also even though the sanctions so far are not aimed at restricting oil. They are restricting activities by buyers and financiers of oil,” said Daniel Yergin, IHS Markit vice chairman. “Russian supplies will be disrupted, but whether they’re manageable or larger will really be determined by events and by the risks buyers and suppliers are willing to take.”

The U.S. Treasury announced a historic move against Russia’s central bank Monday, sanctioning a G-20 central bank for the first time. The Treasury, in essence, has barred Americans from doing any business with the bank as well as freezing assets that are in the United States.

On Saturday, the U.S., European allies and Canada agreed to remove key Russian banks from the interbank messaging system, SWIFT. The exclusion from SWIFT — the Society for Worldwide Interbank Financial Telecommunications — means Russian banks will not be able to communicate securely with banks outside of Moscow.

“I think the markets are behaving… The markets are fairly orderly,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “It seems to be like the net effect of this is like both blades of the scissors. That means we’re going to get higher inflation…but we are also going to get slower growth.”

Chandler said the market is also pricing a less aggressive Federal…