Why Higher Oil Prices Complicate the Fed’s Balancing Act

When the US Federal Reserve sets interest rates, the process typically involves striking a balance between two goals, price stability and full employment. A sharp increase in energy prices as a result of the Iran war and a rise in the unemployment rate in February risks putting those two goals into conflict. That’s likely to prompt Fed officials to hold interest rates steady at their March 17-18 meeting, though the changes in economic conditions could drive more divisions over which of the two priorities — inflation or employment — is more important.

Since 1977, Congress has given the Fed a dual mandate: promote both stable prices and maximum employment to help ensure a strong economy. Typically, when prices are rising, the Fed raises rates to ward off further inflation. When joblessness increases, the Fed cuts rates to lower borrowing costs and spur hiring.