Federal Reserve Chair Jerome Powell on Monday said that U.S. monetary policy is in a good place, and the Fed will wait and see how the ongoing Middle East conflict will impact the economy and inflation before taking further action on interest rates.
Powell reiterated that it is “too soon to know” the long-term scope and duration of the war’s economic effects, noting that geopolitical risks make the outlook uncertain. According to the Fed chair, energy shocks tend to be temporary, and raising interest rates immediately to combat inflation caused by surging oil prices could ultimately harm the economy once the shock passes. The Fed held interest rates steady at 3.50%-3.75% during its March 18 meeting.
Oil and fuel prices have spiked following the Middle East war, with the average national price of a gallon of gasoline now at $3.990 from $2.982 a month ago, raising inflation risk.
The Trump administration has moved to calm oil markets, with Treasury Secretary Scott Bessent claiming the global oil market is well supplied, “Over time, the U.S. is going to retake control of the Straits and there will be freedom of navigation, whether it is through U.S. escorts or a multinational escort,” Bessent told Fox News.
However, traders appear unconvinced, with money markets now pricing in a 42%-52% chance of a rate increase and a 92% probability that rates will not fall in 2026, a sharp reversal from earlier expectations of multiple cuts. Rising energy costs increase expenses for transportation and production, fueling headline inflation and complicating the Fed’s goal of returning to 2% target. High energy prices also tend to slow economic growth, creating a “stagflationary” environment that limits the Fed’s ability to cut rates.
Oil prices are expected to remain elevated, potentially through 2027, driven by geopolitical tensions in the Middle East coupled with limited supply alternatives. Goldman Sachs has warned of structural supply shortages due to the conflict, with analysts projecting prices could reach $150-$200 per barrel if the Strait of Hormuz remains closed.
By Alex Kimani for Oilprice.com
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