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

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Mars Finance News, on June 5th, the latest research from the Boston Fed indicates that as energy efficiency improves and domestic crude oil production increases, the U.S. economy's sensitivity to oil price rises 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 production can partially offset pressures on other sectors, thus 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 also means that inflationary pressures caused by rising energy prices could be more persistent. The Federal Reserve no longer needs to overly worry that rising energy prices will lead to an economic recession, and should instead focus more on controlling inflation with its policies.
Currently, the market generally expects the Federal Reserve 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 the current round of oil price increases is more of a short-term supply disruption and is not enough to be the main driver of rate hikes. The institution expects U.S. interest rates to likely remain unchanged throughout the year and anticipates a rate cut cycle to begin in 2027. However, as geopolitical conflicts push energy prices higher, market expectations for the Fed's policy path have clearly shifted, and recent signals from Fed officials have been hawkish, emphasizing that if inflation remains above target levels, further tightening of policies cannot be ruled out. (Jin10)
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