Why rising oil prices are not what the Fed needs right now
The Federal Reserve is confronting a familiar nemesis as it tries to pilot the economy into a rarely-seen soft landing: rising oil prices.
Surging energy costs played a role in tipping the US into recession in the mid-1970s, as well as the early 1980s and 1990s, as they drove up inflation and robbed consumers of purchasing power.
Driven by cutbacks in supply by Saudi Arabia and Russia, oil prices have surged by almost 30% since June, with benchmark US crude topping $91 a barrel. Though prices are still well below their 2022 highs, the latest rise poses risks as the Fed seeks to return inflation to its 2% target without triggering an economic downturn.
“The run-up in oil prices is at the very tip top of my worries at this point,” said Mark Zandi, chief economist at Moody’s Analytics. “Anything over $100 for any length of time and we’re going to be very sick.”
After boosting interest rates by more than five percentage points over the last 18 months, Fed Chair Jerome Powell and his colleagues are widely expected to hold them steady at their two-day meeting starting today.
Supply shocks such as climbing oil prices present the Fed with a quandary as they simultaneously boost inflation and curb economic growth, leaving policymakers at times uncertain about whether to tighten or loosen credit in response.
The question is becoming particularly salient now, as the central bank debates whether or not it should raise its benchmark rate once more this year before going on hold for an extended period.
Traditionally, the Fed has tended to play down the impact of higher oil prices on inflation, viewing the effect as transitory. That’s one reason why officials focus on core inflation — which strips out volatile food and energy costs —
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