In its latest report, Bank of America stated that persistent shocks in oil prices could pave the way for the Federal Reserve to ease its monetary policy. According to the bank, while markets largely view rising oil prices as a threat to inflation, supply shocks pose risks to both sides of the Fed’s dual mandate.
The report states that monetary policy generally tightens during periods of strong consumer demand and when economic activity is able to withstand supply shocks. This could allow the Fed to prioritize fighting inflation, as it did in 2022 during the Russia-Ukraine war.
However, Bank of America noted that current economic conditions are quite different compared to that period. In 2022, the unemployment rate in the US economy hovered around 4 percent, core PCE inflation was above 5 percent, and non-farm employment was growing by approximately 500,000 per month. Furthermore, consumers had accumulated a significant amount of fiscal stimulus from the pandemic period.
Today, employment growth is slower, inflation is relatively high, and fiscal stimulus is more limited. The bank believes that continued shocks in oil prices could put pressure on economic growth and create conditions for the Fed to adopt a more supportive, or looser, monetary policy.
*This is not investment advice.