The most important development this week was not the Federal Reserve meeting itself, but the sharp and unexpected decline in oil prices. Just days ago, many market participants expected crude to remain elevated amid ongoing tensions in the Middle East. Instead, WTI crude briefly traded with a 73 handle, only modestly above its pre-conflict levels and far below the $90-$100 range that many feared.
At the same time, gasoline and refined product prices have not fallen nearly as much, reflecting constraints in global refining capacity and disruptions tied to Russian refining operations. Nevertheless, if crude prices remain near current levels and those lower input costs eventually flow through to consumers, the inflation outlook could improve dramatically over the second half of the year.
That has important implications for monetary policy. Chairman Warsh delivered a strong first press conference, emphasizing both inflation discipline and the importance of looking beyond backward-looking indicators. I was encouraged by his references to Milton Friedman, the leading monetarist ignored by Jay Powell, and his focus on forward-looking data.
While the Federal Reserve’s recent projections and the dot plots reflected concerns that were formulated when energy prices were substantially higher, the inflation environment may now be changing more rapidly than policymakers anticipated. If oil remains near current levels, headline CPI readings could be exceptionally low over the next several months, even if core inflation measures decline more gradually. Under those circumstances, I find it very difficult to envision the Fed raising rates this year. The political and economic backdrop would simply not support additional tightening while inflation is moving decisively lower.
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Importantly, this does not necessarily imply imminent rate cuts. Core PCE inflation remains above the Fed’s target, and policymakers will want additional evidence that underlying inflation pressures are easing. However, the conversation has shifted. The risk of further tightening appears significantly lower than it did only a few weeks ago, while the possibility of eventual easing becomes more plausible if disinflation continues to gain momentum. Long-term bond markets appeared to recognize this dynamic, with the yield curve flattening following the Fed meeting as investors welcomed a credible commitment to price stability.
The labor market also continues to display resilience. Jobless claims moved lower, and there is little evidence of any economic weakness. This combination of steady employment growth and falling energy prices is particularly constructive because it improves real purchasing power without requiring a deterioration in economic activity. Historically, declining energy costs have acted as a tax cut for consumers, supporting spending and improving business confidence. If gasoline prices follow crude lower over the coming months, that positive psychology could become increasingly important for both markets and the broader economy.
The other major theme this week was AI and productivity. Massive investments in data centers, semiconductors, energy infrastructure and reshoring are creating significant demand for labor even as AI improves efficiency. Rather than producing a labor apocalypse, AI appears more likely to augment workers and raise output per employee. The lesson from history is that technology often changes jobs more than it eliminates them.
This productivity story is particularly important for investors because it supports a more optimistic long-term outlook for earnings growth. While there will undoubtedly be winners and losers as AI reshapes industries, the broader economic impact is positive. Higher productivity allows stronger growth without generating the inflationary pressures that traditionally accompany economic expansions. That is precisely the type of environment that can support both rising corporate profits and more favorable monetary policy.
For markets, the combination of lower energy prices, easing inflation pressures, resilient employment and accelerating productivity remains constructive. The decline in oil prices may also revive the broadening trade that favored value stocks and cyclical sectors before geopolitical concerns redirected investor attention back toward mega-cap AI leaders. I expect investors to increasingly focus on economic resilience rather than recession risks. The path may not be smooth, but the fundamental backdrop remains far more supportive than many expected only a few weeks ago.
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Past performance is not indicative of future results. You cannot invest in an index. Professor Jeremy Siegel is a Senior Economist to WisdomTree, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.
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