The Federal Reserve’s response to the biggest spike in oil prices since the 1970s hinges on how long the energy shock lasts, Fed Chair Jerome Powell said last week. Right now, officials are watching to see what happens.
“It’ll come down to how long the current situation lasts, and then what are the effects on prices, and then how do consumers react,” Fed Chair Powell told reporters last week. “The economic effects could be bigger. They could be smaller. They could be much smaller or much bigger. We just don’t know.”
Conventional wisdom holds that, historically, the Federal Reserve has not responded directly to oil price spikes.
Chair Powell said last week that the “standard learning” for the Fed has been to look through energy shocks. However, that has been dependent on inflation expectations remaining well anchored. Consequently, the Fed’s response should be taken in the context of inflation remaining above the Fed’s 2% goal for the past five years.
“We have to keep all of those things in mind,” Powell said, adding that the Fed won’t approach the question of whether to look through energy inflation lightly.
Read more: What experts say about the possibility of additional rate cuts
Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday, March 18, 2026, in Washington. (AP Photo/Manuel Balce Ceneta) · ASSOCIATED PRESS
A look at how the Fed has reacted to oil price spikes over the past 50 years shows that the central bank tends to focus on inflation when its credibility is at stake, according to research led by Matthew Luzzetti, chief US economist at Deutsche Bank Securities.
Yet there were episodes in which the Fed initially focused on the impact of high energy costs on growth rather than inflation, suggesting that the economic backdrop at the time of the oil shock matters.
In 1973 and 1974, crude oil prices quadrupled from around $3 a barrel to nearly $12 per barrel during the Yom Kippur War and Arab oil embargo. The Fed chair at the time, Arthur Burns, and the majority of the central bank believed raising rates would worsen rising unemployment, so the central bank focused first on the impact of energy inflation on growth.
Before the energy crisis, the Fed had been raising rates to combat inflation in the first half of 1973 but shifted its focus later that year as the economy weakened. As inflation picked up, Burns and the Fed switched back to aggressive hikes by mid-1974.
During the 1979 Iranian revolution, crude prices more than doubled from $14 to over $35 by early 1981. Under then-Chair Paul Volcker, the Fed aggressively fought inflation. Volcker prioritized tackling inflation, even at the cost of a recession, and the Fed raised the rates to a peak of 20% in 1980.
