Will the Fed raise interest rates due to high oil prices? Goldman Sachs doesn't believe so.

Release Time：2026-04-02

On April 1st, Manuel Abecasis, an economist at Goldman Sachs, published a research report stating that although expectations for the Federal Reserve to raise interest rates have risen sharply after the outbreak of the US-Iran conflict, the Federal Reserve is actually unlikely to raise interest rates.

The report emphasizes that if the economy falls into recession, the Federal Reserve is highly likely to cut interest rates, and an oil price shock will not prevent it from taking easing actions. This is mainly based on four reasons:

The current oil shock is smaller in scale and scope: compared with the 1970s, the current increase in oil prices is smaller, and the economy's reliance on oil has significantly decreased nowadays.

Different economic starting points make inflation hard to spread: The labor market is softening, and wage growth has fallen below the level consistent with a 2% inflation target. Long-term inflation expectations are stable, which is different from the situation in the 1970s when expectations got out of control.

Monetary policy has already started from a tight position: since the conflict began, financial conditions have tightened by about 80 basis points, which further reduces the need for additional tightening measures.

The Federal Reserve usually does not respond to a mere oil shock: Historical analysis shows that there is no significant correlation between the mention of oil price shocks in the speeches of Federal Reserve officials and the release of signals for tightening policy. In contrast, there is a stronger correlation among the officials of the European Central Bank.

Goldman Sachs' base case remains two rate cuts in 2026, and its probability-weighted interest rate path forecast is more dovish than market pricing.

The scale and breadth of the current oil price shock are far less than those of historical crises.

Manuel Abecasis pointed out that even when calculated under the "severely adverse scenario", the magnitude of this round of oil price shock is still smaller than that of the 1970s, and its duration is also shorter than that of 2021-2022.

More importantly, the current U.S. economy is far less dependent on oil than it was in the 1970s. Data shows that both the energy intensity of GDP and the share of gasoline in personal consumption expenditures (PCE) have dropped significantly since then.

At the supply chain level, although the conflict in Iran may cause disruptions to trade routes and the prices of some non-oil commodities in the Middle East, so far, the scope of its impact is significantly narrower than the large-scale supply disruptions and commodity shortages seen during 2021-2022. Of course, as the conflict persists, the outlook for supply chains remains uncertain.

From the perspective of the inflation transmission path, the rise in oil prices will significantly boost overall inflation, but its impact on core inflation will be relatively limited. Moreover, this shock will fade over time as oil prices will not keep climbing year after year.

At the same time, higher oil prices will depress real disposable income, drag down economic growth and employment. Goldman Sachs predicts that the unemployment rate will rise to 4.6% in 2026; if oil prices rise further, the increase in the unemployment rate will be even greater.

The mainstream view in previous economic research also held that central banks should "turn a blind eye" to short-term energy price shocks, for reasons similar to those for tariff shocks. As oil price shocks are temporary and simultaneously suppress demand, monetary policy tightening would only exacerbate damage to the labor market and do little to curb inflation.

This is also one of the reasons why the Federal Reserve and other major central banks pay more attention to core inflation rather than overall inflation.

The economic fundamentals lack the conditions to "fan the flames", and the probability of a secondary spread of inflation is low.

Goldman Sachs emphasizes that the current macro environment makes the probability of a large-scale secondary effect of inflation extremely low.

Looking back at history, there is a common feature in the severe inflation periods of the 1970s and 2021-2022: the labor market was extremely tight and wage growth accelerated.

In the 1970s, this overheating state had persisted for many years before the first major oil price shock in 1973; the expansionary fiscal policies of the 1960s had already pushed the economy to the brink of overheating as it entered the 1970s; the large-scale fiscal stimulus in 2020-2021 played a similar role.

In contrast, the US labor market is currently weakening, with wage growth falling below the level consistent with a 2% inflation target, while medium- and long-term inflation expectations remain well anchored.

By building a model based on data from G10 countries, Goldman Sachs believes that when the labor market is relatively loose, long-term inflation expectations are anchored, and fiscal policy is less expansionary, the probability of a sustained increase in core inflation caused by supply-side shocks is significantly reduced.

The starting point of monetary policy is more neutral, and the threshold for raising interest rates is higher.

The starting point of the current monetary policy is quite different from that of the past two major inflationary events.

Currently, the Federal Reserve's federal funds rate is 50 to 75 basis points above the median estimate of the neutral rate in the Summary of Economic Projections (SEP) and is roughly in line with the recommendations of standard policy rules.

In contrast, at the beginning of 2021-2022, the federal funds rate was at zero, significantly lower than the neutral rate; the same was true in the 1970s, when the policy rate was far below the neutral level and the recommended value by policy rules.

In addition, since the conflict broke out, financial conditions have tightened by about 80 basis points, which further reduces the necessity of actively tightening monetary policy.

The Federal Reserve has never raised interest rates solely in response to an oil price shock in its history.

Goldman Sachs' historical analysis shows that there is no significant correlation between the mention of oil price shocks in the speeches of Federal Reserve officials and the signals of tightening monetary policy, while there is a stronger correlation for the officials of the European Central Bank.

From the scenario analysis presented by the Fed staff to the FOMC, in the case of rising oil prices, the staff's predictions typically show that overall inflation rises, core inflation increases slightly, economic growth slows down, the unemployment rate rises, but the federal funds rate remains relatively unchanged from the baseline forecast.

At the same time, neither FOMC members nor the chair of the Federal Reserve have historically systematically raised policy rate projections in response to oil price shocks.

Moreover, historical data shows that in previous recessions that preceded oil price surges, the FOMC had cut the policy interest rate by approximately 3.5 percentage points. Goldman Sachs has now raised the probability of a recession in the next 12 months by 10 percentage points to 30%, and expects that if a recession does occur, the Federal Reserve will initiate interest rate cuts.

Overall, Goldman Sachs believes that the current situation is fundamentally different from the "high-risk" backdrop of the 1970s and 2021-2022.

Whether considering the scale and breadth of supply shocks, the starting point of the economic fundamentals, the initial stance of monetary policy, or the historical responses of the Federal Reserve, the threshold for this round of interest rate hikes is far higher than what is currently reflected in market pricing.

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