The most significant global oil crisis in decades presents a substantial hurdle for the Federal Reserve, whose policymakers convene this week to chart the forthcoming course for the U.S. economy.
President Donald Trump’s conflict with Iran has caused a sharp surge in petroleum costs, with WTI, the benchmark for American crude, briefly touching $120 last week. This threatens to inflate the price of nearly everything Americans purchase. Concurrently, these elevated energy expenses risk straining businesses and households, thereby dampening hiring and slowing economic expansion.
This dual menace of rising inflation and a weakening labor market traps Fed officials in a no-win predicament, arriving precisely as Kevin Warsh, Trump’s nominee to chair the central bank, awaits Senate confirmation—a highly inopportune moment for any official advocating for interest rate cuts.
The Fed has not encountered an oil shock this severe since the Arab-Israeli War of 1973, which precipitated the infamous stagflation episode of that decade. However, America’s economy is markedly different today, and its central bank is unlikely to react as policymakers did half a century ago, when aggressive rate hikes steered the economy into recession.
Comparing the Oil Shocks
As the world’s largest oil producer, the United States is far less reliant on imported oil now than during previous energy crises. Nevertheless, experts contend that the current disruption to global energy markets is far greater in scope.
“The sheer volume of oil production out of the Gulf region that is currently offline due to this war is substantially greater than back then,” Nicholas Mulder, a Cornell University history professor studying the economic fallout of wars, told CNN. “We are talking about 20 million barrels versus roughly four and a half million in 1973… so it is truly several times larger.”
A worker operates valves at the Rumeila oil field as the country cuts output by nearly 1.5 million barrels per day amid suspended exports following the closure of the Strait of Hormuz in Basra, Iraq, on March 4, 2026.
A worker operates valves at the Rumeila oil field as the country cuts output by nearly 1.5 million barrels per day amid suspended exports following the closure of the Strait of Hormuz in Basra, Iraq, on March 4, 2026. Essam Al-Sudani/Reuters
In October 1973, Egypt and Syria launched a surprise assault on Israel in a conflict that quickly escalated, eventually drawing in the United States.
The Arab members of the Organization of the Petroleum Exporting Countries retaliated by halting oil supplies to Western nations. This inflicted considerable damage on the U.S. economy, which at the time was heavily dependent on foreign oil. Under then-Fed Chairman Arthur Burns, policymakers resisted raising interest rates, arguing that the disparate factors driving the inflation of that era—including the oil shock—were largely beyond the reach of monetary policy. Although the Fed eventually raised rates, it did so incrementally. Economists now assert that this “stop and go” approach allowed inflation to become entrenched and did little to support growth.
One economist articulated this sentiment in a presentation delivered at one of the Fed’s rate-setting meetings at the time: “The question is whether monetary policy can do anything about the persistent residual level of inflation … The answer, in my view, is no. … It strikes me that we should be looking at the continuing cost increases as a structural problem impervious to macroeconomic measures.”
This archival photo from December 23, 1973, shows cars lined up two deep at a gas station in New York.
This archival photo from December 23, 1973, shows cars lined up two deep at a gas station in New York. Marty Lederhandler/AP
But America is now the world’s top oil producer and commands a service-based economy, rendering it less susceptible to global production cuts. Furthermore, Fed officials, having learned from Burns’ missteps, generally now believe that monetary policy plays a vital role in managing economic shocks.
However, “today we are in a scenario where facilities are under attack by Iranian drones and missiles,” noted Josh Freed, Senior Vice President for the Climate and Energy Program at Third Way. “This is physical damage that takes time to repair, so this is potentially worse than the 1970s oil embargo. There is an enormous amount of uncertainty surrounding all of this.”
Americans Feel the Pinch
Americans are already noticing the strain at the pump, and the conflict is beginning to affect public inflation expectations: the latest University of Michigan consumer survey, released Friday, showed sentiment dipping 2% this month compared to February, with consumers increasingly citing the war in their responses.
On the employment front, there is also little breathing room. The Bureau of Labor Statistics reported earlier this month that employers shed 92,000 jobs in February as the unemployment rate ticked up from 4.3% to 4.4%. A separate report on Friday showed job openings rose by 400,000 in January compared to December, although there are still more unemployed job seekers than available positions.
“There is virtually no doubt that the war with Iran will have an inflationary impact,” stated Tani Fukui, Senior Director of Economic and Market Strategy at MetLife Investment Management. “But how large that impact will be remains an open question.”
The issue for Americans navigating this oil crisis is not only how high prices will climb, but whether the Fed can effectively utilize historical lessons to prevent the economy from collapsing.
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