The Federal Reserve's next policy meeting this month has become harder to predict, as a run-up in oil prices tied to the Middle East war complicates the central bank's read on inflation.
Coming into the late summer, much of the debate among economists centered on how much further the Fed might cut interest rates as growth cooled. That conversation has shifted in recent days. With oil above $95 a barrel and bond yields climbing, some economists and commentators are now openly asking whether the Fed could instead need to raise rates, or at least pause any further cuts, if energy costs keep feeding into broader inflation.
The Fed's dilemma is a familiar one for central banks facing an external oil shock: raising rates to fight inflation risks slowing an economy that may already be softening, while cutting rates to support growth risks letting inflation expectations drift higher. Fed officials have generally said they will watch incoming data, including how much of the oil price increase feeds through to consumer prices at the pump and beyond, before deciding their next move.
Markets will be watching Fed communications in the coming weeks for any signal on how policymakers are weighing that trade-off, particularly given how quickly the energy price backdrop has shifted since the war escalated again this week.
Any further escalation that pushes oil meaningfully higher would likely sharpen this debate heading into the Fed's meeting.
Why would higher oil prices affect Fed policy?
Oil is a key input cost across the economy, so a sustained rise can push up inflation, which is one of the Fed's main considerations when setting interest rates.