Bullard Admits OPEC Cuts May "Make [Fed's] Job A little More Difficult"

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by Tyler Durden
Monday, Apr 03, 2023 - 02:53 PM

“This was a surprise,” said St. Louis Fed President James Bullard when asked about the impact of OPEC+'s sudden and unexpected decision to cut crude production dramatically (prompting a spike in oil prices).

A nasty surprise too, as we detailed previously, because while the US central bank is already trapped, and is desperately looking for any excuse to halt its tightening campaign now that inflation is accelerating to the downside not just because regional banks desperately need a lower Fed Funds rate to short-circuit the relentless deposit drain which won't stop (and will lead to even more bank failures and resolutions) until their deposit rates can at least match those of the Fed, but also because various liberal rags have already thrown Powell, pardon, the "Trump-era holdover" under the bus for the coming recession...

... OPEC's shocking shot across the Fed and Biden bow revealed in its intention to keep oil prices high even as central banks push the world into a recession, just made life for the central planners very difficult, as the sordid stench of stagflation is suddenly all over the place.

But while much will be said about the monetary consequences of OPEC's action, Bullard is aware of the potential for the trap above:

“Oil prices fluctuate around. It’s hard to track exactly. Some of that might feed into inflation and make our job a little bit more difficult,” he said.

Bullard did hedge a little, noting that “whether it will have a lasting impact I think is an open question.”

As a reminder, Bullard said last month that his own forecast was for rates to peak at 5.625% this year. Officials next meet May 2-3.

While acknowledging the potential importance of the shift, Bullard noted that an increase in oil prices this year was consistent with his economic outlook for more demand for energy.

“I would’ve expected somewhat higher oil prices anyway with China coming back sooner than expected during the first half of 2023 and with Europe skirting recession,” he said.

“And strong data in the US, all of those are are pretty bullish factors for the oil market.”

While we know that Bullard is a non-voting member of the committee this year, it is clear he represents the more hawkish members' thinking.

The outspoken hawk played down fears of the banking crisis escalating (and thus the odds of a more dovish Fed):

“The problem with Wall Street is they’ve got too much probability on that branch,” Bullard said about the turmoil translating into a worsening economy.

Markets should "listen to me" Bullard chides..

But with oil prices spiking alongside China's PMI miss overnight combined with US Manufacturing's weakness this morning, stagflationary fears are really started to build... Central bankers' greatest nemesis.