The Big Money Show discusses how escalating tensions in the Strait of Hormuz and Houthi attacks are pushing oil prices up, which is impacting global markets.
Jerome Powell, the Chairman of the Federal Reserve, noted that the U.S. economy is currently grappling with a supply shock due to oil supply disruptions in the Middle East. This follows earlier shocks like the pandemic and tariff-induced price increases.
While addressing an economics class at Harvard University, Powell remarked that ongoing supply shocks have kept inflation higher than the Fed’s 2% long-term target, even though it has decreased significantly from a peak of 9.1% in 2022.
“By late 2024, we should be nearing 2%,” Powell stated. “Initially, we were addressing tariff impacts, which have diminished significantly here in the U.S., largely because other nations didn’t retaliate strongly, and the actual implementation of tariffs was less than anticipated.”
He continued, “Inflation was about 3%, fluctuating between 0.5 and 0.8 percentage points due to customs duties. It’s been hovering close to 2% for a while. And now we’re faced with a new supply shock.”
Goldman Sachs has indicated that the ongoing conflict in Iran may further elevate inflation this year.
“This situation is somewhat unprecedented with multiple supply shocks,” Powell explained. “First, it was the pandemic, then a smaller one from tariffs, and now we have an energy shock.” He also expressed uncertainty regarding the potential severity of this energy crisis, saying, “It’s still too soon to tell.”
The price of West Texas Intermediate crude, which was hanging around $60 to $70 per barrel just a month ago, has climbed to over $102 per barrel as of Tuesday, surpassing $100. Meanwhile, Brent crude oil, which previously traded between $65 and $75, is now approximating $120 per barrel due to the crisis.
The national average price for regular gasoline surged over a dollar per gallon last month, moving from $2.98 to $3.99—an increase of about 34%, spurred by rising oil prices, according to AAA data.
Powell indicated uncertainty about how the energy supply disruptions would ultimately affect prices. He remarked that the Federal Reserve’s monetary policy is equipped to adapt to scenarios where interest rates may need to be cut or raised to stabilize the economy or manage inflation.
“I believe we’re well-positioned to adopt a wait-and-see stance regarding policy,” Powell added.
The market currently predicts an 80% chance that the Fed’s benchmark federal funds rate will hold steady within the range of 3.5% to 3.75% for the remainder of the year.
