Oil price surge impacts the Federal Reserve, presidents of three regional Feds: Energy inflation transmits slowly, but risks have risen significantly

Forex Network April 3 News—— Several Federal Reserve district presidents have recently commented on the impact of the current sharp rise in energy prices on the US economy and monetary policy. They generally believe that the inflationary pressure caused by soaring oil prices will take some time to fully transmit to the broader economy, significantly increasing uncertainty in the Federal Reserve's policy making. Fed officials generally consider that a cautious and wait-and-see approach should be maintained, adjusting the policy path flexibly based on subsequent economic data, in order to balance the dual objectives of inflation control and employment support.

Several Federal Reserve district presidents have recently commented on the impact of the recent sharp rise in energy prices on the US economy and monetary policy. They generally believe that

Williams: Monetary Policy Well Positioned, Energy Impact Transmission May Take Several Months to a Year

New York Federal Reserve Bank President Williams stated on Thursday (April 2) that current monetary policy is well positioned. He pointed out that the transmission of energy prices to other goods and services “usually takes several months, or even up to a year to be fully reflected.” Williams said the Fed is currently closely monitoring the dynamics of rising energy prices and their impact on the overall economy.

Logan: US Oil Output Unlikely to Rise Sharply in Short Term, Inflation Remains Top Concern

Dallas Federal Reserve Bank President Logan said at a conference on Thursday that US oil producers are unlikely to sharply ramp up output in the short term to ease the pressure of rising gasoline prices faced by consumers. She noted that the breakeven oil price for US producers to begin new drilling is slightly below $70 per barrel, well below the current oil price of around $110. Logan added that only when oil prices stay at or above this breakeven point for a sustained period will companies make necessary investments, which will eventually bring relief to consumers.

Logan stated: “US oil companies need to be convinced that high oil prices will be sustained for a while, so I haven’t heard anything yet about a significant production increase in the short run.” She believes that while the US has certain buffers that countries close to conflict zones do not, energy price increases related to the US-Israel-Iran conflict will still put short-term pressure on inflation and overall economic activity.

Logan emphasized that inflation remains one of her main economic concerns. She said: “Even before the outbreak of the Middle East conflict, I was not convinced we were steadily moving toward the 2% inflation target. Restoring price stability and bringing inflation back to 2% is crucial, because stable inflation is the cornerstone of a strong economy.”

Logan echoed the views of many colleagues, . She pointed out: “At this point, I am very much inclined to think in terms of scenario analysis. I think policy is ready to adjust as new data emerges, and we are also prepared to adjust the policy path when appropriate.”

Goolsbee: Poor Timing of Oil Price Shock, Heightened Risks of Inflation Expectations

Chicago Federal Reserve Bank President Goolsbee said on Thursday that as last year’s tariff-induced inflation pressures have not fully dissipated, the economy is now facing an oil shock that has pushed prices higher, a “poor timing” situation that concerns him.

Goolsbee said: “When gasoline prices rise sharply in a short period of time, people—especially consumers—significantly raise their expectations for the coming 12 months of inflation. This could put us in a much tougher spot.” He noted that since the outbreak of the Iran war, the sharp rise in oil prices has also heightened uncertainty for businesses, resulting in a slowdown in hiring activity.

Goolsbee further stated that the rise in oil prices is quite significant, . If oil prices remain high for a long period, it will be reflected in consumer confidence and will push up food and manufacturing prices. Meanwhile, when gasoline prices rise sharply, they might also have some complex effects, further boosting inflation expectations, thus putting the Fed in an even tougher policy position. He added that while the US economy had previously demonstrated some resilience, the oil price shock has added another layer of uncertainty.

The Dilemma of Energy Prices Tests the Fed's Dual Mandate

The surge in energy prices has become a major challenge currently facing the Federal Reserve. Last year, amid still high price pressures, the Fed cut interest rates by 0.75 percentage points to boost a weak labor market. Now, this war has not only further heightened the risk of rising inflation but also brought new difficulties to the labor market and overall economic growth.

The Federal Reserve thus faces a difficult trade-off: fulfilling its mandate of containing inflation while simultaneously promoting sustainable maximum employment growth.

Traditionally, the Fed often ignores short-term energy price increases, as such rises usually have only a temporary impact on overall inflation with limited transmission to core prices. However, St. Louis Federal Reserve Bank President Musalem stated on Wednesday that with inflation continuing to run above target, the risk of energy-driven inflation developing into a long-term economic problem is increasing.

The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index, rose 2.8% in January. Stripping out food and energy, the core increase was 3.1%, an even more challenging situation. This backdrop has led to market speculation that the Fed may need to raise rates to tackle relentless inflation pressures. However, at last month’s meeting, the Fed decided to keep the target overnight rate in the 3.50%-3.75% range and expects to cut rates only once by 2026.

, the latest statements from New York Fed President Williams, Dallas Fed President Logan, and Chicago Fed President Goolsbee show that the sharp rise in energy prices has already posed a real challenge to the US economy. While the full impact of the energy shock will take months or even longer to be fully reflected, it has significantly increased uncertainty in Fed policymaking. Fed officials generally agree that the current stance should be cautious and flexible, and the policy path should be adjusted based on subsequent economic data to balance the dual objectives of inflation control and employment support.

According to CME "FedWatch": The probability of the Federal Reserve raising rates by 25 basis points in April is 0.5%, and the probability of keeping rates unchanged is 99.5%. By June, the probability of a cumulative 25 basis point rate cut is 6.0%, keeping rates unchanged is 93.5%, and a cumulative 25 basis point rate hike is 0.5%. By December, the probability of a cumulative 25 basis point rate cut is 35.1% (the previous day was 25.1%), the probability of rates remaining unchanged is 50.2% (the previous day was 73%), and the probability of a cumulative 25 basis point rate hike is 14.7% (the previous day was 1.9%).

The future trajectory of the Middle East conflict and the persistence of oil prices will become key variables affecting the Fed's next policy decision.