Wed. Oct 4th, 2023
    Policy makers may overlook rising energy prices, says strategist

    According to investors, traders, and strategists, the upcoming release of updated inflation and interest-rate forecasts by the Federal Reserve will likely disregard the full impact of rising oil prices. Oil prices reached new highs in 2023, surpassing $90 a barrel, as a result of the extension of production cuts by Russia and Saudi Arabia. Despite concerns about inflation, it is uncertain if the increase in energy prices will spill over into the core inflation gauges that the Fed is primarily concerned about. As a result, policy makers may choose to overlook the impact of higher energy prices on their longer-term inflation and rate outlook. Energy and food are considered volatile components of inflation and are often not given much weight by the Fed. However, some traders believe that excluding oil from the equation could be a mistake, given other price pressures such as strikes by major U.S. automakers. The omission of oil could result in the market seeking its own inflation protection, causing inflation expectations to become unanchored.

    Traders and investors will be closely monitoring the Fed’s Summary of Economic Projections, particularly the fed-funds rate target for 2024. Policy makers had previously projected four 25-basis-point rate cuts for next year, along with inflation gradually decreasing towards 2% in 2024 and 2025. However, the expectation for no rate hike by the Fed on Wednesday suggests the possibility of rate cuts beginning in the middle or final half of next year. Inflation traders now anticipate seven straight months of 3%-plus readings on the annual headline CPI rate, complicating the Fed’s future actions.

    Despite the potential impact of higher oil prices on rate projections, the general consensus is that the Fed’s rate decision had already been determined prior to these developments. While higher oil prices may have a modest impact, it is believed that it is too early for the narrative on disinflation to change. Ultimately, policy makers will likely focus on the broader economic indicators while downplaying the effects of rising energy prices.

    – Dow Jones Newswires
    – MarketWatch