The Federal Reserve may prioritize fighting inflation over protecting employment when responding to oil price shocks.
A move made possible by changes in the structure of energy consumption in the United States. This conclusion was reached by researchers at the Federal Reserve Bank of Boston in a report published Thursday.
According to the bank's economists, the American economy's dependence on global energy markets has changed dramatically since the 1970s, thanks to improved energy efficiency and rising domestic production.
The researchers found that sharp increases in oil prices now have a smaller impact on inflation than they once did. Furthermore, high oil prices can stimulate employment in the domestic energy sector, offsetting the job losses typical of past decades.
The more limited impact on the labor market reduces the disinflationary effect that traditionally follows mass layoffs resulting from energy shocks. This means that inflationary pressures in the current environment will be stronger than in the past. "The vulnerability of the US economy to oil shocks has fundamentally changed—it has not disappeared, but it has taken on a different form," the economists wrote.
According to the researchers, their findings suggest that monetary policy should focus on the inflationary consequences of oil shocks rather than their impact on employment. The report was released against the backdrop of rising oil prices caused by the war in the Middle East.