The recent increase in gasoline prices has caused a daily impact between 300 million and 350 million dollars on consumers in the United States. This oil supply shock has simultaneously raised the price of the barrel and strengthened the US dollar, generating relevant effects on the global economy.
At the most recent Federal Open Market Committee (FOMC) meeting, interest rates were kept stable despite the inflationary pressure generated by rising energy costs. The appreciation of the dollar has accompanied the increase in US Treasury yields, indicating investors’ preference for safe assets amid greater uncertainty.
Furthermore, the persistent rise in oil prices increases the global inflation risk and triggers financial flows to the dollar, considered a safe haven in times of instability. This movement has forced global markets to adapt to the restrictive monetary policy practiced in the United States, resulting in financial adjustments for other economies as well.
The burden of rising oil costs affects low- and middle-income households more significantly, compressing their cash flows and reducing purchasing power. If monetary policy does not adapt to this scenario, there is a risk of a global recession because high fuel prices put pressure on the economy in essential sectors.
Finally, recent moves of the dollar and gold reflect the expectation that US monetary policy will remain restrictive to contain inflation. Thus, the combination of the oil supply shock and FOMC decisions shapes a challenging environment for financial markets and the economy on a global scale.
History and differences in the Federal Reserve’s response to oil shocks
Oil shocks in the 1970s caused accelerated inflation that led to a strict response from the Federal Reserve (Fed) with monetary tightening policies. At that time, the US central bank significantly raised interest rates to contain rising prices and stabilize the economy. This period was marked by increased inflation and recession as a result of measures taken against the supply shock.
During the Gulf War in 1990, the Fed adopted a more flexible stance toward the rise in oil prices. Despite the supply shock, US monetary authorities chose not to raise interest rates, seeking to support economic growth. Thus, they avoided a monetary tightening that could have worsened the slowdown observed at that time.
Between 2007 and 2008, even with the price of a barrel of oil reaching about 147 dollars, the Fed’s policy was different from previous episodes. The US central bank cut interest rates and implemented measures to ease stress in the financial system instead of tightening monetary conditions. This strategy aimed to contain the impacts of the global financial crisis rather than respond to the oil shock in isolation.
Currently, the Fed maintains a more restrictive monetary policy despite the weakening of economic growth, differing from the model adopted in past shocks. This stance reflects concerns about persistent inflation, which has led the central bank to prioritize price control. On the other hand, history shows that the Fed usually ignores supply shocks when inflation expectations remain stable, adopting a more flexible policy.
In previous episodes, when inflation remained under control, the gold market performed better while debt securities suffered under milder monetary policies. The current scenario stands out for a more restrictive response and a more severe economic impact, marking a divergence from the historical pattern. Additionally, the dollar, as a reserve and global reference currency, causes Fed decisions to influence financial conditions on a global scale.
Previous elevated supply shocks did not trigger widespread inflation thanks to wage controls and anchored inflation expectations. However, the recent shock presents a distinct situation both in its economic effects and in how the US central bank has reacted, indicating a significant change in the conduct of monetary policy amid external pressures.
