Powell more hawkish over Israel, oil, inflation fears?

Federal Reserve Chair Jerome Powell is expected to be extra hawkish in his key policy speech on Thursday amid growing concerns over surging oil prices, driven by the Israel-Hamas war, which could fuel inflation fears.

The head of the US central bank prepares to speak at noon to the Economic Club of New York, with the chief executive of a leading financial advisory and fintech saying that, “Powell will, of course, be treading a fine line.”

“He will be saying that inflation is coming down – but, in order to avoid complacency and to excite markets and consumers, he will make the case again about the surprising strength of the US economy despite higher interest rates,” said Nigel Green, CEO of deVere Group.

“Directly or indirectly, he’ll reiterate the need for ‘higher for longer’ rates to get inflation back to its 2% target.”

Green added that, “we expect that the Israel-Hamas war, which has driven up oil prices in recent days, will give Powell license to be extra hawkish, amid fears that an extended conflict could help fuel inflation in the US.”

Inflation

“The surge in oil prices resulting from Middle East tensions could significantly contribute to inflation in the United States. 

“Higher energy costs, increased input costs, and the cascading impact on various industries can all drive prices higher in the US and globally.”

The oil situation is worsened by the US maintaining lowest stockpile of oil since the 1980s.

The Strategic Petroleum Reserve (SPR) is a protection from disruptions in the oil supply.

Millions of barrels are stored underground as a back-up. But 40% of these reserves have been sold in recent years.

“The markets have largely priced-in that the Fed will stay on hold for rates at their next meeting and will be looking at Powell’s speech for clues that this is right,” said Green.

“We expect that recent events in the Middle East, and their effects on oil markets, will make Chair Powell more cautious than many had been expecting,” he concluded.