The Federal Reserve is facing pressure to cut interest rates from both investors and President Donald Trump. But the recent and brief rise in oil prices following an attack on oil fields in Saudi Arabia earlier this month presents a problem with that rate-cutting strategy: Inflation.
The threat of stagflation, which is a toxic combination of a slowing economy combined with rising prices, could make Fed chair Jerome Powell’s job much more difficult. Central bankers will need to pay closer attention to economic data points before making any further moves to cut rates.
“The Fed is like a base runner stuck between first and second base on a fly ball,” said Matt Forester, chief investment officer of BNY Mellon’s Lockwood Advisors. “It will need to be even more data dependent and reactionary. Higher oil prices would be a shock that is stagflationary.”
Forrester also noted that higher oil prices are “unwelcome news,” because of concerns about the weakening economies of China and Europe.
He added that if the United States and China don’t come to a resolution on trade and more tariffs start later this year, that could lead to higher prices on many consumer goods. Together with prolonged increase in oil prices, that could hurt the US economy.
“The biggest concern right now is how any oil price spike might work its way into GDP,” Forrester said. “Any additional shocks from trade and tariffs could be stagflationary as well.”
Because Trump has been intense with his approach to China, some experts still aren’t ruling out stagflation as a threat right around the corner.
“On the trade front, prospects for a constructive, pro-growth deal are rapidly fading. In our opinion, this raises the odds that the Fed will ultimately be contending with stagflation — inflation caused by tariffs combined with a slowdown in economic growth,” said Lisa Shalett, chief investment officer with Morgan Stanley Wealth Management, in a recent report.