In March 2022, the price of oil exceeded 120 dollars per barrel after the Russian invasion of Ukraine, leading the Federal Reserve (Fed) to begin the most aggressive interest rate hike cycle since the 1980s. The main goal was to contain high inflation, which had remained above the 2% target since the beginning of the pandemic.
However, this was not the first time the Fed had to adjust its monetary policy in response to energy market shocks. During the 1980 oil crisis, the institution raised the key interest rate to 20% in order to curb inflation caused by the abrupt increase in fuel prices. This measure resulted in a recession but was considered necessary to control rising inflation.
In the Yom Kippur crisis, between 1973 and 1974, the price per barrel jumped from US$ 3 to almost US$ 12. The Fed alternated between rate hikes and pauses, seeking to balance the inflationary impact without harming the economy. On the other hand, during the 1970 oil crisis, the institution’s priority was to slow economic growth to address rising unemployment, representing a more cautious approach in the face of the energy shock.
Another episode marked by an oil price shock occurred between 1990 and 1991, during the first Gulf War, when prices nearly doubled. Initially, the Fed focused on containing inflation but then eased its monetary policy in response to the ensuing recession. This move demonstrates the flexibility adopted to respond to the variable economic dynamics caused by external factors.
Currently, the Federal Reserve is carefully assessing the effects of the recent increase in oil prices, which rose by 50% since February 2024 due to the conflict in the Middle East. According to the Fed, prolonged energy cost shocks have the potential to influence core inflation and, consequently, monetary policy formulation. Chairman Jerome Powell emphasized the importance of monitoring all economic variables to measure the real impact of this rise.
Additionally, Fed Governor Chris Waller commented on the complexity of the prolonged effects of high oil prices, stressing that the persistence of the shock can alter both inflation and economic growth. The President of the San Francisco Fed, Mary Daly, presented various scenarios based on the duration of the current conflict, indicating that the stabilization or expansion of the energy crisis will guide future decisions of the monetary authority.
Overall, the Fed considers that a sustained increase in oil above 100 dollars per barrel could hinder economic expansion in the United States. In contrast, analyses by Deutsche Bank indicate that temporary shocks in this market can be tolerated, given the current context of the global economy. Finally, the expectation is that the Federal Reserve will continue evaluating the developments of the conflict and the evolution of prices to adjust its policy as necessary.
