New York Fed sees no sustained energy price surge amid Middle East conflict

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NY Fed on energy prices

Highlights

New York Fed's John Williams states oil prices are likely near peak and should decline over the next six to twelve months despite renewed Middle East conflict.
Minutes from the Fed's mid-June meeting show officials maintained the 3.5%-3.75% target rate and still foresee rate hikes this year due to persistent inflation.
Williams emphasizes balance sheet reductions must prioritize financial system stability, while Chairman Kevin Warsh offers no forward guidance after his first FOMC meeting.

Oil outlook and July policy setting

As reported by Reuters, Williams says market expectations for oil still point to lower prices over the next six to 12 months, which he describes as a reasonable baseline. He says energy prices are likely near their peak and should ease over time despite the renewed war in the Middle East.

Asked how the Fed could respond to recent events at the Federal Open Market Committee meeting scheduled for July 28-29, Williams says officials have not even started that analysis. He adds that the central bank meets every six weeks and is not making permanent decisions at each gathering.

Williams speaks a day after the release of minutes from the Fed's mid-June policy meeting, when officials keep the target range for interest rates at 3.5% to 3.75%. Forecasts released at that meeting indicate policymakers still pencil in rate increases this year as inflation remains above target.

Inflation risks and balance sheet debate

Earlier in the week, Williams says he has become more optimistic that high inflation will ease because of lower energy prices linked to what had appeared to be a resolution of the Middle East war. That view comes under pressure after hostilities restart, raising concerns over disruptions to the flow of energy and other goods.

With President Donald Trump saying the agreement that ended the hot phase of the conflict is now void, the risk of higher energy prices and inflation later this year rises, increasing the possibility that the Fed could need to raise rates to contain price pressures. At the same time, Chairman Kevin Warsh, after leading his first FOMC meeting, declines to give guidance on the policy outlook or explain in detail how incoming data could shape his decisions.

Williams also weighs in on discussions over how the Fed manages its rate-setting tools and balance sheet, as Warsh considers further reducing central bank holdings. He says any changes should prioritize banking system safety and stability, arguing the focus should be on strengthening the financial system rather than simply maximizing balance sheet reduction.

In our earlier article on WTI rebounding on Middle East tensions, we noted that crude was holding near recent highs as markets priced in rising risks from the escalating U.S.–Iran confrontation and potential disruptions around the Strait of Hormuz. We also highlighted mixed U.S. inventory signals alongside an elevated geopolitical risk premium, keeping volatility high even without a major interruption in oil flows.

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