JPMorgan Chase chief economist Bruce Kasman is warning that the ongoing conflict in the Middle East is creating the conditions for an unpredictable and potentially runaway surge in oil prices.
In a new CNBC interview, Kasman says the economy is caught between improving labor market fundamentals and a building energy price drag that could ultimately force the Fed’s hand in a direction most investors are not expecting.
Looking at oil, Kasman warns that he sees prices spiking rapidly if the Strait of Hormuz remains closed.
“As we continue to keep the Strait closed, we’re starting to draw down inventories. We’re starting to potentially run into some physical constraints in places like Asia. And perhaps most importantly, at some point, if we don’t feel that this conflict is going to get resolved, there’s a risk of a scramble for oil, which is going to start to create non-linear price increases.”
Even if the conflict resolves without triggering a scramble, Kasman says the inflationary damage is already partially done and that the economy will be operating in a structurally different environment on the other side of it.
“If we get through this, we’re going to be sitting with energy prices more elevated. We’re going to be sitting with 3% inflation as a more persistent part of the environment.”
On the labor market, Kasman sees improving conditions ahead, with US job growth expected to get back above 100,000 per month in the coming months and the unemployment rate likely to drift lower as labor supply constraints bite. But the improvement, combined with persistent inflation, creates a policy dilemma for the Federal Reserve.
“Looking forward six or nine months in the constructive scenario, the Fed is going to have pressure to hike rates… I do think the pressure, if we do not have a more serious energy price shock to deal with, is that the pressure is going to lean in the direction of the Fed having to think about raising rates.”
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