Key Takeaways:
Federal Reserve Bank of New York President John Williams said he does not expect a sustained rise in energy prices this year, pushing back against inflation fears as crude oil surged 6% on renewed US-Iran hostilities.
Federal Reserve Bank of New York President John Williams pushed back against inflation fears Thursday, saying he does not expect a sustained surge in energy prices despite crude oil's 6% jump on renewed Middle East hostilities.
"I'm not looking for a sustained rise in energy prices over the remainder of the year," Williams said in prepared remarks. The comments came as the US launched strikes against more than 80 targets in Iran following attacks on commercial shipping in the Strait of Hormuz, and President Trump declared the ceasefire with Iran over.
The dollar index rose 0.09% on safe-haven demand, while the euro slipped 0.03% as Europe's energy import dependence made it more vulnerable to the oil spike. Swaps markets now price a 34% probability of a 25-basis-point rate hike at the Federal Open Market Committee's July 28-29 meeting, up from negligible odds before the escalation.
Williams's assessment carries weight because it suggests the Fed views the oil spike as transitory rather than persistent — a distinction that determines whether the central bank's next move is a hike or a hold. The IMF projects global growth will slow to 3% in 2026 from 3.5% in 2025 as a result of the conflict, before rebounding to 3.4% in 2027, according to a joint statement from the IEA, IMF, World Bank and WTO.
The Fed's current policy stance — with the fed funds rate having been held steady after the most aggressive tightening cycle in four decades — leaves the central bank in a wait-and-see position. A sustained energy price shock would complicate the inflation fight by raising import costs and consumer price expectations, potentially forcing a reversal of the pause.
ECB Governing Council member Joachim Nagel struck a more cautious tone, saying he "cannot rule out" another interest rate increase. The euro zone imports most of its energy, making it disproportionately exposed to the oil rally. Markets price a 15% chance of a 25bp ECB hike at the July 23 policy meeting.
The International Energy Agency, IMF, World Bank and WTO issued a joint statement Wednesday warning that "uncertainty remains high, and the impacts of the war could linger." The four organizations pledged to monitor energy, trade and economic developments and to strengthen readiness to act further if needed.
Williams's confidence that energy prices will not sustain their rally stands in contrast to the bond market's repricing. The last time the Fed faced a comparable geopolitical oil shock — following the 2022 Russia-Ukraine invasion — crude surged above $120 a barrel and the Fed embarked on its most aggressive tightening cycle in decades, ultimately raising rates by 525bp to a peak of 5.25-5.50% in July 2023.
If Williams is correct and oil prices retreat, the Fed can maintain its current posture and markets may unwind some of the 34% hike probability. If energy costs persist, that probability could rise quickly, forcing a policy response that would ripple through equities, bonds and currencies. The next FOMC decision on July 28-29 will offer the first formal test of whether the central bank's view holds.
This article is for informational purposes only and does not constitute investment advice.
