Oil prices surge, impacting the Federal Reserve. The three major regional Fed presidents: energy inflation transmission is slow, but risks have significantly increased.

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Source: Huitong Finance

Multiple Federal Reserve regional presidents recently offered their views on how the sharp surge in current energy prices is affecting the U.S. economy and monetary policy. They generally believe that the inflation pressure caused by a spike in oil prices needs some time to fully pass through to the broader economy, but this shock has clearly increased the difficulty of the Fed’s policy trade-offs between inflation and employment.

Williams: Monetary policy is in a good position; energy transmission may take months to a year

On Thursday (April 2), New York Fed President Williams said that current monetary policy is in a good position. He noted that the transmission of energy prices to other goods and services prices “usually takes months, and it could even take up to a year to show up fully.” Williams said the Fed is currently closely monitoring the developments related to the rise in energy prices and their impact on the overall economy.

Logan: U.S. oil production is unlikely to increase significantly in the short term; inflation remains the top concern

On Thursday, Dallas Fed President Lorie Logan said at a meeting that U.S. oil producers are unlikely in the short term to ease the pressure on consumers from rising gasoline prices through a major increase in production. She pointed out that the break-even oil price level needed for U.S. producers to begin new drilling is slightly below $70 per barrel—far below the current oil price of about $110. Logan added that only if oil prices stay at or above this break-even level for some time will companies make the necessary investments, which will ultimately bring some price relief to consumers.

Logan said: “U.S. oil companies need to be confident that high oil prices will remain for a period of time, so I haven’t heard that there will be a major increase in production in the short term.” She believes that although the United States has buffer capacity that countries near the conflict zones do not, the energy-price increases tied to a potential U.S.-Iran war will still put pressure on inflation and overall economic activity in the short term.

Logan emphasized that inflation remains one of the economic issues she cares about most. She said: “Even before the outbreak of conflict in the Middle East, I wasn’t sure we were steadily moving toward our 2% inflation target. Restoring price stability and bringing inflation back to 2% is crucial, because stable inflation is a cornerstone of a strong economy.”

Logan echoed many of her colleagues’ views, saying that the current high level of uncertainty means the Fed should stay in a wait-and-see mode while closely watching how economic data perform. She said: “I’m very inclined to think from the perspective of scenario analysis right now. I think policy is set up to adjust based on data as it is released, and we are also prepared to adjust the policy path at the appropriate time.”

Goolsbee: The timing of the oil-price shock is poor, increasing the risk of higher inflation expectations

On Thursday, Chicago Fed President Austan Goolsbee said that while the inflation pressure triggered by last year’s tariff shock has not yet fully faded, the economy has again been hit by an oil shock that pushes prices higher. This “poor timing” concerns him.

Goolsbee said: “When gasoline prices rise sharply within a short period of time, people—especially consumers—significantly increase their expectations for the inflation path over the next 12 months, which could put us in an even more difficult situation.” He noted that since the outbreak of the Iran war, the sharp rise in oil prices has also increased uncertainty for businesses, leading to a slowdown in hiring activities.

Goolsbee also further said that the severity of the oil-price rise is considerable, and the key issue is how long this surge will last. If oil prices remain high for an extended period, it will show up in consumer confidence and push up prices for food and manufacturing. At the same time, when gasoline prices rise sharply, it may also bring some complex effects that further raise inflation expectations, putting the Fed in an even more challenging policy position. He added that while the U.S. economy previously showed some resilience, the oil-price shock has added another layer of uncertainty.

Energy Price Dilemma Puts the Fed’s Dual Mandate to the Test

The surge in energy prices has become an important challenge currently facing the Fed. Last year, against the backdrop of still-elevated price pressures, the Fed lowered interest rates by 0.75 percentage points to support a weak jobs market. Now, this war not only increases the risk of inflation rising further, but also brings new difficulties to the labor market and overall economic growth.

The Fed therefore faces a difficult trade-off: it must both fulfill its responsibility to curb inflation and promote growth in maximum sustainable employment.

Traditionally, the Fed often overlooks short-term spikes in energy prices because such increases typically have only a temporary effect on overall inflation and limited pass-through to core prices. However, on Wednesday, St. Louis Fed President Alberto Musalem said that current inflation remains above the target level for a sustained period, which increases the risk that energy inflation could evolve into a long-term economic problem.

The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose 2.8% in January. If food and energy costs are excluded, the core increase is even higher at 3.1%, making the situation more severe. Against this backdrop, the market has speculated that the Fed may need to respond to the continuously rising inflation pressure by raising interest rates. However, at the meeting last month, the Fed decided to keep the overnight interest rate target in the 3.50%-3.75% range, and it expects to cut rates only once in 2026.

In summary, the latest remarks from Fed officials such as New York Fed President Williams, Dallas Fed President Logan, and Chicago Fed President Goolsbee show that the sharp rise in energy prices has posed real challenges to the U.S. economy. While the full impact of the energy shock may take months or even longer to fully become evident, it has already significantly increased uncertainty in Fed policy-making. Fed officials generally believe that a cautious wait-and-see approach is warranted now, and that the policy path should be flexibly adjusted based on subsequent economic data in order to balance the dual goals of controlling inflation and supporting employment.

According to CME’s “FedWatch”: The probability of the Fed raising rates by 25 basis points in April is 0.5%, and the probability of keeping rates unchanged is 99.5%. The probability of cumulative rate cuts of 25 basis points by June is 6.0%, and the probability of keeping rates unchanged is 93.5%, with the probability of cumulative rate hikes of 25 basis points at 0.5%. The probability of cumulative rate cuts of 25 basis points by December is 35.1% (25.1% the previous day), the probability of keeping rates unchanged is 50.2% (73% the previous day), and the probability of cumulative rate hikes of 25 basis points is 14.7% (1.9% the previous day).

The future direction of conflict in the Middle East and the persistence of oil prices will be key variables affecting the Fed’s next decision.

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责任编辑：朱赫楠