Geopolitical Risks Drive Oil Prices Higher, Renewing Pressure on the Federal Reserve

Xinhua Finance, Shanghai, June 17 (Reporter: Ge Jiaming) — Volatility in the Middle East has triggered sharp fluctuations in global oil prices, adding uncertainty to U.S. inflation and economic prospects. The Federal Reserve now faces renewed challenges regarding its path toward interest rate cuts this year.

Industry experts told Xinhua Finance that instability in the Middle East has led to a significant surge in crude oil prices. On one side, market expectations for U.S. inflation are rising once more, which could drive U.S. Treasury yields higher and worsen the country's fiscal conditions. On the other side, persistently elevated oil prices may threaten the broader U.S. economy and labor market, significantly increasing the risk of stagflation.

Heightened geopolitical tensions have fueled global risk aversion. Given the potential for significant disruption in oil supply under extreme scenarios, international oil prices have climbed sharply in recent sessions. In early trading on June 17, both New York WTI and Brent crude futures rose briefly, with Brent nearing a 2% gain and peaking at $74.85 per barrel.

Since the beginning of 2024, U.S. consumer inflation expectations have surged. The recent jump in energy prices could cause short-term inflation expectations to climb again. With the impact of tariff policies, inflation could spread across more categories and reinforce rising expectations, potentially forming an inflationary spiral. This would increase the scale and duration of inflation risk in the U.S.

JPMorgan noted in a recent report that while core personal consumption expenditures (PCE) inflation has dropped from a peak of 5.6% in 2022 to a recent low of 2.5%, the trend has reversed. The report forecasts a rebound in U.S. core PCE to 3.4% by the end of 2024.

Analysts have cautioned that prolonged conflict, or the extreme event of a Strait of Hormuz closure, could drive oil prices up to $130 per barrel, pushing the U.S. inflation rate to 6%.
Ryan Sweet, Chief U.S. Economist at Oxford Economics, remarked that although oil price increases may fuel inflation, the broader context of weakening U.S. economic momentum means that high oil prices could suppress consumption, weaken demand, and spill over into the labor market.

At 02:00 on June 19 (Beijing time), the Federal Reserve is set to announce its June interest rate decision, followed by a press conference led by Chair Jerome Powell. Analysts generally expect the Fed to keep the federal funds rate target range at 4.25%–4.50%, marking the fourth consecutive pause. During the meeting, the central bank will also release its updated “dot plot” and economic projections.

The current U.S. economic landscape remains complex. While several Fed officials have previously signaled a prolonged period of stable rates, President Trump's criticism of Powell and renewed calls for rate cuts—combined with rising oil prices—have intensified uncertainty surrounding future monetary policy.

Joe Brusuelas, Chief Economist at RSM, stated in a recent report that if short-term inflation expectations continue to rise among consumers, the Fed may maintain a cautious stance, potentially delaying rate cuts until December or even 2026. “Tariffs and oil prices are likely to push the Fed to postpone rate cuts, and could even result in rate hikes,” he noted.

Stephen Juneau, U.S. Economist at Bank of America, said on June 16 that the geopolitical backdrop raises the risk of a more severe stagflation scenario in the U.S. However, he pointed out that current oil prices are still relatively low compared to a year ago, suggesting that further developments should be closely monitored.

Sweet added that the U.S. economy has already slowed and is now vulnerable to external shocks, including sharp short-term increases in oil prices. If the Federal Reserve concludes that the economic and labor market effects of rising oil prices outweigh their impact on inflation, it may consider initiating rate cuts earlier than expected.