Fed Raises Interest Rates for First Time in Three Years as Diesel, Gas Prices Surge

How high are oil prices? High enough to shift the balance of monetary policy at the Federal Reserve.

On Wednesday, with the benchmark Brent crude index lingering around $105 per barrel, the central bank’s monetary policy committee announced its unanimous decision to raise the benchmark federal funds rate by a quarter-point. The increase, which takes the rate to a range of 3.75% to 4%, is the first since 2023, a move that looked far from certain as recently as one week ago when traders were penciling in just a 60% chance of a hike, according to CME’s FedWatch tool. A lot can change in just a few days.

Spot Check

“The plain fact is that inflation is too high and has been for too long,” Fed Chair Kevin Warsh said at a news conference Wednesday, while pointing to the war in Iran as a chief reason for adjusting his previously dovish stance. Attacks late last week by Houthi rebels on Saudi Arabia’s East-West pipeline, used to divert oil flows from the Strait of Hormuz to the Red Sea, forced the closure of the critical artery. Ahead of the shutdown, the pipeline was moving about 4 million barrels of oil per day, or about 4% of global supply. Its absence looks like enough to crack an already fragile energy market. Options to ease the supply blockage, such as strategic reserves, are “largely now played out, and we don’t have nearly the buffers in the system that we did when it began,” Chevron CEO Mike Wirth said at an energy conference last Friday.

Crude prices have jumped to their highest levels since the start of the war, and gas prices climbed to about $4.37 per gallon on Wednesday while diesel prices reached a record $6.31 per gallon, according to AAA. There are no indications of a turnaround in the near future:

• Americans have spent an additional $107 billion on gas and diesel since the military’s attacks on Iran began in February, according to estimates from the Climate Solutions Lab at Brown University. 
• Diesel prices in some states may soon cross the $7 threshold, GasBuddy’s head of petroleum analysis Patrick De Haan told Barron’s. Meanwhile, households that use heating oil could see costs increase from $1,749 to $2,520 this winter, National Energy Assistance Directors Association executive director Mark Wolfe said.

Up in the Air: What’s next? Twelve of the Fed’s monetary policymakers projected another quarter-point increase by the end of the year, while four predicted two such hikes. Speaking of projections: Executives at both United and American Airlines said Wednesday that they may decrease flight capacity to offset rising fuel costs. Translation: Book your holiday flights ASAP.