The ongoing political conflict in the Middle East has caused oil prices to rise, raising fears of inflation that could damage the US economy. The last time inflation rose suddenly was in 2022, and it forced the Federal Reserve to raise interest rates so quickly S&P 500(SNPINDEX: ^GSPC) The index fell by more than 20%, entering a bear market.
The Fed has cut interest rates six times since September 2024, and Wall Street entered 2026 expecting more rate cuts. But rising oil prices and other economic indicators have forced analysts to revise their forecasts, and the likelihood of future interest rates. climb mountains it’s just off the table, which is another reason why the S&P 500 is down nearly 9% in the past month from its recent all-time high (it has since recovered).
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Fed Chairman Jerome Powell made a series of public statements at Harvard University on March 30 that eased concerns about rate hikes; here’s why it’s good news for the stock market.
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The Fed has two main goals. It aims to maintain an annual inflation rate of around 2%, as measured by the core Personal Consumption Price Index (PCE), and aims to keep the economy operating at full employment, although policymakers do not have a specific target for the unemployment rate.
Core PCE has risen significantly over the past three months, from an annual rate of 2.8% to an annual rate of 3.1%. That means the current risks to inflation are two-fold – not only is core PCE above the Fed’s 2% target, but it’s also rising. Policy makers will usually be raising interest rates in this situation.
However, the labor market is showing clear signs of weakness. According to the latest jobless claims report from the Bureau of Labor Statistics, the US economy lost more than 92,000 jobs in February. The unemployment rate is now at 4.4%, close to a five-year high.
Also, in his remarks prepared after the Fed’s March policy meeting, Powell said he thinks the US private sector has formed. zero jobs in the past six months, after adjusting to overcounting due to disruptions in data collection during the government shutdown. Raising interest rates can make the job market worse, so the central bank is bound.
Oil is a production cost for any product that travels by land, air, or sea, so consumers may face higher prices not only at the gas station, but also at the grocery store and at their favorite retailers. This will surely drive the core PCE in the coming months.
However, on March 30, Powell said the central bank often tries to “look out” for short-term supply threats such as rising oil prices. Interest rate adjustments take time to work through the economy, so the hike probably won’t have the desired effect until a few months from now, when political conflicts in the Middle East should have been resolved.
Powell expressed satisfaction with the current level of interest rates, suggesting that the Fed may hold monetary policy steady as the current situation continues. However, it is important to note that his term as Chairman of the FED is scheduled to officially end on May 15, when President Donald Trump’s new nominee, Kevin Warsh, is expected to take the reins (if confirmed by the US Senate). Therefore, the Fed’s policy stance may change soon.
When interest rates rise, companies cannot borrow as much to fuel their growth, and their interest costs increase, which is an important factor for their bottom line. That’s bad news for the stock market, which is largely driven by corporate earnings, so it’s no surprise that the possibility of higher interest rates contributed to the recent 9% decline in the S&P 500.
Investors will be relieved that interest rates are likely to remain on hold for the foreseeable future, but oil prices need to decline over the next few months for the Fed to maintain this policy stance. If tensions in the Middle East continue until the end of this year, higher oil prices could cause a rise in long-term inflation expectations, which could cause interest rates to rise in 2027.
In that case, the S&P 500 will likely remain under pressure, as it did in 2022 and 2023. Fortunately, this does not appear to be a likely outcome.
The Trump administration has proposed a four-to-six-week timeline for the Middle East conflict, and now that it’s in its fifth week, the conflict may end soon. In fact, the White House says the administration is close to meeting its goals, and negotiations appear to be taking place behind the scenes.
If there is a resolution soon, the S&P 500 may recoup some of its recent losses. Now, within the next few months, I would expect Wall Street to start predicting a recovery in interest rates. wounds dealing with an easing labor market, which should support more gains in the stock market.
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Federal Reserve Chairman Jerome Powell recently gave good news for stock market investors, The Motley Fool reported.
