Oil Prices Rise, Impacting Inflation Expectations; Federal Reserve Announces Interest Rates Held Steady

How does geopolitics influence the Federal Reserve’s policy space?

Since September last year, the Federal Reserve has cut interest rates three times, but following the U.S. military strikes on Iran, market expectations for further rate cuts have significantly diminished. Indeed, on the 18th, after the March policy meeting, the Fed announced that the federal funds rate target range would remain unchanged at 3.5% to 3.75%.

Rising oil prices have driven inflation, which is key to the Fed’s decision to hold steady. Fed Chair Jerome Powell stated that energy price increases will temporarily boost overall inflation, but the extent and duration of the Middle East situation’s impact on the U.S. economy remain uncertain. Given the unclear effects of rising oil prices on consumer spending, the Fed has had to adopt a wait-and-see approach. He also acknowledged that the pressure from higher oil prices on spending, employment, and inflation makes the Fed’s situation very challenging.

As of 5 p.m. on the 18th, the Fed monitoring tools showed that the market assigns over a 50% probability that the Fed will raise or maintain the current interest rate at the December meeting, significantly higher than the 23.5% a week earlier.

Li Yuanqing, a reporter from Dragon TV, noted that for the Fed, the issue is not just slowing growth but also how the energy shocks caused by war are disrupting its original policy rhythm. The decision not to cut rates this time was not surprising; what is more noteworthy is that the signals from the Fed are becoming increasingly cautious: while economic slowdown pressures have not fully disappeared, rising oil prices and transportation costs due to the war are complicating inflation prospects and further shrinking the room for future rate cuts.

Affected by concerns over inflation driven by rising oil prices and the Fed’s decision to keep rates steady, investors have started selling U.S. stocks. On the 18th, all three major indices in the New York stock market declined sharply. Bruce Shin, an industry analyst, believes that the market may continue to fluctuate in the short term, and the impact of oil prices cannot be ignored, with commodities potentially affected as well.

Additionally, gold prices, the U.S. dollar index, and U.S. Treasury yields have also been impacted. Fang Xiaoli, a reporter from Dragon TV, observed that unlike in the past, gold has fallen rather than risen, dropping from high levels below $5,000. Safe-haven assets are showing clear signs of weakening. Meanwhile, the dollar index has risen over 2%, and the 10-year U.S. Treasury yield has climbed above 4.2%, with U.S. Treasuries experiencing sell-offs. Analysts believe that driven by oil prices, market sentiment is shifting from “safe-haven” to “inflation hedge,” leading to noticeable adjustments in global asset pricing.

News reporters: Li Yuanqing, Ren Meixing, Fang Xiaoli

Editor: Du Ji

Chief Editor: Chen Yanqing