Can the US withstand the double whammy of surging crude oil prices and rising interest rates? The answer will depend on how long oil prices stay elevated and how aggressive the Federal Reserve is in hiking rates to tamp down runaway inflation.
In response to the surge in oil and gas prices, commodity price inflation and supply chain uncertainty in the wake of the Russia/Ukraine war and international sanctions on Russia, economists are slashing GDP forecasts across the board.
At its recent meeting, the Fed raised its benchmark rate by a quarter percentage point to 0.25-0.50% and took down its US GDP forecast for 2022 to 2.8% from 4.0% in December. Fed chair Jerome Powell said the probability of a recession is “not elevated”, pointing to strong aggregate demand and labour market, along with rising wages and healthy consumer balance sheets.
ICIS forecasts 3.3% US GDP growth in 2022 with risks to the downside along with a 36% chance of recession – up from 26% in January. The US is partially insulated from higher oil prices because of its large oil and gas industry but $100-120/bbl oil is still a net negative for the economy.
FED TIGHTENING CYCLE TO TAMP DOWN INFLATION
While high oil prices and overall inflation extract a toll on household budgets, the Fed’s “dot plot” implies 6-7 additional quarter-point rate hikes in 2022. Fed members have a median target of 1.9% for its benchmark rate through the end of this year. - ICIS-