The Fed’s Logan said US oil producers are unlikely to provide near-term relief for consumers

Written by Michael S. Derby

April 2 (Reuters) – Dallas Federal Reserve President Lorie Logan said on Thursday that U.S. oil producers are unlikely to increase production and protect consumers from higher gasoline prices in the near future.

The price US producers say they need to see to start drilling is just shy of $70 a barrel, below the current price of about $110 a barrel, Logan said during a meeting at his regional Fed bank. He also said that prices at or above that level will need to be maintained so that firms can make the necessary investments that will ultimately bring relief to consumers.

US oil firms “need to have the feeling that high prices are going to stay for a while, so I don’t feel we’re going to see a big increase in production here anytime soon,” he said.

Logan’s comments suggest that rising energy prices related to the US-Israel conflict with Iran will remain a near-term problem for inflation and overall economic activity, although he says the US has constraints that other countries close to the conflict do not.

The head of the Dallas Fed noted that inflation continues to be one of his main economic concerns. “On the inflation side, and before the conflict in the Middle East, I didn’t believe we were on track to reach our 2% target,” he said. “It is very important to restore price stability, to restore inflation to 2% because stable inflation is the basis of a strong economy.”

Agreeing with the monetary policy view of many of his colleagues, Logan said that the current uncertainty means that the Fed should watch and wait while taking information about economic activity.

“I really like to think about things as they are now,” Logan said. “I think the policy is set to adapt to the data as it comes in, and we’re prepared to make changes in the direction of the policy when appropriate.”

THE PRICE OF SUBSTITUTE PAIN

Rising energy prices are a notable challenge for the Fed at the current time. The US central bank cut interest rates by three percent last year as it sought to provide support to a soft labor market amid heightened inflationary pressures.

The war increases the risk that inflation will rise further, while creating new challenges for the labor market and overall economic growth. As a result, there are tough odds for the Fed, which is mandated by Congress to contain inflation and promote sustainable job growth.

The central bank typically focuses on energy price increases, as they tend to affect price pressures over time and bleed into prices less. St. Louis Fed President Alberto Musalem, however, said on Wednesday that the long-term high inflation creates a greater risk that energy prices could become a long-term economic problem.

Capital Economics said in a report that the “indirect impact” of higher energy prices on inflation, separate from broader wages and price increases, could range from seven to ten percent in the US to about 1.5 points in the euro area, the UK and Japan somewhere in between.

The Personal Consumption Expenditures Index, which the Fed chooses as an inflation gauge, rose by 2.8% in January, and by 3.1% it is even tougher when food and energy costs are taken out.

Fears of inflation have led to speculation in the markets that higher rates may be needed to combat inflation. The Fed left its overnight interest rate in the 3.50%-3.75% range at a meeting last month and released projections showing policymakers are expected to cut the rate by one in 2026.

The war has “increased our level of uncertainty economically and visually, made our jobs more difficult because it increases risks on both sides of our command,” Logan said.

If resolved quickly, the economic impact would be “modest,” he said. However, a long war may have “bad” results that “would have gone in different directions regarding our two orders, and caused a lot of tension between our responsibilities,” Logan added.

(Reporting by Michael S. Derby; Editing by Paul Simao)