Federal Reserve Research: Dilemma Weakening Under Oil Price Shocks, Prioritizing Inflation Control

BlockBeats News, June 5 — The latest research from the Boston Fed indicates that, with improvements in energy efficiency and increased domestic crude oil production, the U.S. economy's sensitivity to rising oil prices has significantly decreased. Unlike the oil crisis of the 1970s, today rising oil prices no longer cause large-scale shocks to the employment market; the additional jobs created by increased oil and gas industry output can partially offset pressures on other sectors. Therefore, the likelihood of high oil prices triggering a stagflation scenario of "high inflation + high unemployment" has markedly decreased.

However, the report also warns that the buffering mechanism of oil price shocks on employment has weakened, which means that inflationary pressures caused by rising energy prices could be more persistent. The Federal Reserve no longer needs to overly worry about energy price increases leading to an economic recession, and should instead focus more on controlling inflation. The current market generally expects the Fed to keep interest rates unchanged at the June meeting, but some officials have already begun discussing the possibility of rate hikes within the year.

Meanwhile, Morgan Stanley believes that this round of oil price increases is more of a short-term supply disruption and is not enough to be the core factor driving rate hikes. The firm expects U.S. interest rates to likely remain unchanged throughout the year and anticipates a rate cut cycle to begin by 2027. However, as geopolitical conflicts push energy prices higher, market expectations for the Fed's policy path have clearly shifted. Recently, Fed officials have also frequently sent hawkish signals, emphasizing that if inflation remains above target levels, further tightening of policies cannot be ruled out. (Jin10)