Powell warns of new energy supply shocks that threaten to push inflation higher
The Big Money Show reveals that the conflict in the Strait of Hormuz and the attack by the Houthis are driving up oil prices and fueling global markets.
The chairman of the Federal Reserve Jerome Powell he said the US economy is facing an oil supply shock due to oil supply disruptions in the Middle East after previous shocks such as the COVID-19 pandemic and tariffs pushed up prices.
Powell spoke to an economics class at Harvard University on Monday and said a series of asset shocks had been sustained inflation has risen above the bank’s long-term 2% target despite progress to reduce the pace of price growth from a peak of 9.1% in 2022.
“We were very close to 2% in late ’24,” Powell said. “We were just talking about the impact of costs, which have come down a lot here in the US and not abroad. They were less than expected because some did not retaliate, and because what was done was less than what was announced.”
“We were at an inflation rate of about 3% and in some places it was between 0.5 and 0.8 [percentage points] of that comes from the cost. We have been very close to 2% this whole time. Now there’s another shock coming,” Powell said.
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Federal Reserve Chairman Jerome Powell said it is not clear how severe the shock will be to the economy. (Kent Nishimura/Getty Images)
“You know, it’s one of those times where you get a series of asset shocks: first the pandemic, then a very small one from the costs, and now we get an energy shock,” he said.
Powell added, “Nobody knows how big it’s going to be, it’s too early to know.”
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Oil and gas prices have increased due to the Iran war. (Matthew Hoen/NurPhoto via Getty Images)
Oil prices rose above $100 a barrel, while the price of West Texas Intermediate crude oil rose above $102 a barrel on Tuesday after trading in the $60-$70 range last month before the outbreak of war in Iran.
Brent crude oil is also trading at around $112 a barrel and has been close to $120 a barrel since the conflict began, after trading in a similar range between $65 and $75 a barrel before the conflict began.
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The war with Iran has slowed the flow of oil through the Strait of Hormuz. (Giuseppe Cacace/AFP via Getty Images)
Gas prices increased largely due to rising oil prices, as the national average price of regular gasoline rose more than $1 per gallon last month — rising from an average of $2.98 last month to $3.99 as of Monday, according to AAA data. That’s an increase of about 34% from last month.
Powell said that while it is not clear how severe the price shock from the energy supply disruption will be, the The Federal Reserve monetary policy is set to allow a response to situations that require policymakers to lower or raise interest rates to support the economy or curb inflation, respectively.
“We think our policy is in a good place to wait and see,” Powell said.
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The market currently sees an 80% chance that the Fed funds rate will remain at its current level of 3.5% to 3.75% for the rest of this year.
