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Oil Markets On Edge As Fed Signals More Rate Hikes To Come

The Fed has more work to do in taming inflation and the key interest rate needs to move up to above 4% by early 2023 and stay there, Cleveland Federal Reserve Bank President Loretta Mester said on Wednesday, in a message that could further drive down oil prices.  

The Fed’s current target policy rate is in the 2.25%-2.5% range, after two consecutive hikes of 75 basis points, or 0.75%.  

Markets fear that aggressive interest rate hikes from central banks, including the Fed, would slow down economies – and oil demand growth – for a prolonged period of time. Oil prices were headed early on Wednesday for a third consecutive month of losses, which began in June with the first large Fed rate hike.   

In a Friday speech, Federal Reserve’s Chair Jerome Powell said that large interest rate hikes could continue and could slow the economy “for some time,” and that rates could be higher for longer.  

“July's increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting,” Powell added. 

During a speech at the Dayton Area Chamber of Commerce in Dayton, Ohio, Cleveland Fed President Mester said today “My current view is that it will be necessary to move the fed funds rate up to somewhat above 4 percent by early next year and hold it there; I do not anticipate the Fed cutting the fed funds rate target next year.” 

Related: BP Looks To Restart The Midwest’s Largest Refinery

Economic slowdown is to be expected, although a U.S. recession is not a base-case scenario, Mester said. 

“I do acknowledge that the risks of recession over the next year or two have moved up because financial conditions are tightening globally, inflation remains at high levels in many countries, and the devastating war in Ukraine adds considerable uncertainty and downside risks to the growth outlook, especially in Europe,” Mester noted. 

“That said, at this point, I have not incorporated a recession into my baseline outlook for the U.S., but instead expect a fairly sharp slowing in activity, especially when compared to the robust growth the U.S. experienced in 2021.” 

By Tsvetana Paraskova for Oilprice.com

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