Oil could spoil Fed plans

By 24/06/2021News

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The oil market has been showing a positive trend throughout the week. The price of a barrel of WTI oil has surpassed pre-pandemic coronavirus levels. The US Fed continues to print huge amounts of money. What guarantee is there that oil will not cost $100 a barrel? Will the US then be able to cope with inflationary pressures?



In fact, the situation is complicated. At his last speech Powell said that 5% inflation in the US was unacceptable. The Fed now predicts inflation at 3.1% by the end of the year, with not much left before 5%.
But what happens if the price of oil continues to rise? After all, the cost of energy is built into the price of almost all goods. Inflation would accelerate under such circumstances. In this situation, Powell and team will have to raise the inflation target once again. And what will the central bank do? It will have a hard time continuing the quantitative easing program and keeping interest rates at current levels. It will have to raise it in an emergency.
Given all of the above, it is not in the interests of the US to increase the price of oil now, as inflation could become uncontrollable. Therefore the first thing to do is to negotiate with Iran now so that it can fully enter the oil market. But that will probably not be enough. Saudi Arabia will also need to be persuaded to increase production. It is possible that this issue will already be raised at the OPEC+ meeting to be held on 1 July.
What will all this mean for us? Firstly, we need to keep a close eye on the oil price. Most likely, the US will try to cool the market by all means.
Second, the central bank will try to weaken the US dollar because any strengthening of the dollar automatically makes oil even more expensive for all buyers in other currencies as it is denominated in US dollars. Again, this will be a problem for everyone.

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