Federal Reserve Chair Jerome Powell is confronting a wave of economic pressures—rising tariffs, ballooning national debt, a weakening dollar, and now, fresh conflict in the Middle East.
The recent escalation between Israel and Iran has so far had a limited effect on global oil prices. Brent Crude currently trades just above $76 per barrel, marking a $5 increase over the past five days—still lower than prices seen earlier this year in January.
Yet with the specter of a broader regional war on the horizon, economists say Powell would be wise to revisit the Federal Reserve’s strategies for managing oil shocks. While there’s no literal guidebook, history offers key lessons—and cautionary tales.
Learning from the 1970s: A Case Study in What Not to Do
“If there were a Fed Chair’s playbook for oil shocks, the first chapter would be titled: ‘The 1970s—What Not to Do,’” said Donald Kohn, a former Federal Reserve vice chair who joined the central bank shortly after the 1973 Arab oil embargo.
That embargo, triggered when Gulf states at war with Israel halted oil exports to the U.S., sent prices soaring. But Kohn said the deeper issue wasn’t just the price of fuel—it was how those prices altered consumer psychology.
“We had a very bad experience in the 1970s in which oil prices jumped, inflation kept ratcheting higher. The Fed would tighten occasionally, inflation would come down but not down enough,” Kohn explained. “You have to make sure inflation expectations are anchored, and people don’t expect prices to continue to rise and rise more generally than just oil.”
The 2022 Oil Shock: A Modern Replay
More recently, in 2022, inflationary pressure was already mounting due to post-pandemic supply chain disruptions when Russia’s invasion of Ukraine sent oil prices above $100 per barrel. That shock forced the Fed to shift swiftly from a stimulus-oriented policy to aggressive rate hikes.
“The oil price shock of 2022 suddenly made inflation a much more urgent problem for the Fed,” said Bill Adams, chief economist at Comerica Bank. “Which is why they pivoted so quickly from stimulus to a restrictive monetary policy, high interest rates.”
That pivot eventually brought inflation closer to target levels. Today, inflation expectations remain relatively stable, offering the Fed a measure of breathing room.
Prioritizing Growth Over Panic
However, if energy prices spike again due to unrest in the Middle East, some economists argue the Fed’s focus should shift away from headline inflation and toward preserving economic momentum.
“Let’s just think about what happens if we do have a shock in the price of gas,” said Stephanie Aliaga, an analyst at JPMorgan Asset Management. “Well, consumers are going to feel that pinch in their wallets, and particularly in an economy like we have today.”
Her message: rather than reacting forcefully to inflation, Powell may need to weigh the potential impact on consumer spending and broader economic growth.
For now, oil markets remain relatively calm, and the Fed’s rate strategy appears on track. But with global tensions flaring, Powell may soon find himself thumbing through the next chapter of an all-too-familiar playbook—hoping it doesn’t need a 2025 edition.
