The Fed's Dilemma: Between Rising Oil Prices and a Faltering US Labour Market
After a year focused on combating inflation, the US stock market now finds itself trapped in a thick fog of uncertainty. Wall Street stands at a dangerous crossroads, caught between two conflicting forces: a hot energy price rally and a cooling labour sector. This dilemma makes the Fed’s next steps the most difficult puzzle to solve since the pandemic era ended.
For investors using the Pluang platform, understanding this dynamic is not merely about following the news, but rather a strategy to protect portfolios from potential extreme volatility that may occur in the remainder of this year.
Cracks in the Economic Foundation — Why is the US Labour Market Beginning to Weaken?
For the past two years, the US labour market has been the last “fortress” preventing the economy from sliding into recession. However, recent data shows that this fortress is beginning to show significant cracks.
Warning Signs from Unemployment Figures
The latest Non-Farm Payrolls (NFP) report revealed a surprising fact: the US unemployment rate has crept up to 4.4%. Although historically this figure remains relatively low, the speed of increase from its low point of 3.4% last year has activated what economists call the “Sahm Rule”.
Note: The Sahm Rule states that recession begins when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low point during the preceding 12 months. Currently, we are very close to this threshold.
Cooling Labour Absorption
It is not only the unemployment rate that is rising, but new job creation is also slowing drastically. Private sector employment absorption has fallen to below 100,000, a sharp decline compared to last year’s average of 220,000 per month.
Consistent revisions to US employment data, with reductions of 120,000 to 150,000 jobs from initial figures, demonstrate the fragility of the US labour market. The impact of the high interest rate of 5.25%-5.50% is beginning to pressure corporations and private sector growth.
Oil Shock — An “Emergency Brake” on Interest Rate Cuts
At a time when the economy shows signs of needing help through interest rate reductions, the energy sector is delivering a hard blow. Geopolitical tensions in the Middle East, particularly between Israel and Iran, have driven crude oil (WTI) to breach the $85-90 per barrel zone.
Why Is Oil Price Escalation So Dangerous for the Fed?
The Fed has a dual mandate: maintaining price stability (2% inflation) and maximising employment. The problem is that rising oil prices are the primary enemy of price stability.
— Transportation and Production Inflation: Rising oil prices directly impact logistics costs. Each increase in petrol prices in the US will be reflected in the next month’s Consumer Price Index (CPI) figures.
— Domino Effect on Consumer Goods: When shipping costs rise, retailers such as Walmart or Amazon tend to pass these burdens to consumers, ultimately triggering core inflation.
— Pressure on Purchasing Power: For Americans, rising petrol prices represent a “hidden tax” that reduces money available for discretionary spending (such as gadgets, dining out, or entertainment), which directly hits the performance of technology and consumer sector shares.
Mathematically, analysts estimate that each permanent $10 increase in oil prices can contribute approximately 0.2% to 0.3% to annual inflation. If oil remains above $90, the market’s dream of seeing inflation fall to 2% will evaporate, and the Fed will be forced to maintain high interest rates for longer (higher for longer).
Stagflation Risk — The Worst-Case Scenario for Investors
The combination of slowing economic growth (rising unemployment) and persistent high inflation (rising oil) is the recipe for the most feared economic phenomenon: stagflation.
Under normal circumstances, the Fed could lower interest rates if unemployment rises to stimulate the economy. However, if inflation remains high because of oil prices, lowering rates risks making inflation explode even worse. This dilemma is what blurs the Fed’s policy path.
Changing Market Expectations
Based on the CME FedWatch Tool, before this oil turmoil, the market was very optimistic that there would be at least three interest rate cuts this year. However, currently:
● The probability of a cut in June dropped below 50%.
● The yield on US 10-year bonds remains in the 4.3%-4.5% range, indicating that the bond market still anticipates “sticky” inflation.
Portfolio Strategy — Navigating Amid Uncertainty
As an investor using the Pluang platform, you have access to various asset classes that can be used to mitigate this risk. The following is an in-depth sectoral analysis:
- Energy Sector Shares
This is the most logical hedge. Shares of major oil companies such as ExxonMobil (XOM) and Chevron (CVX) have a very strong positive correlation with crude oil prices. Or investing in the Energy Select Sector SPDR Fund (XLE), which moves in line with global energy trends. When the S&P 500 index may be pressured by high interest rates, the energy sector often moves in the opposite direction and provides a cushion for your portfolio.
- Gold as a Safe Haven
Gold benefits from two factors simultaneously: as a safe haven from Middle East conflict and as a hedge against stagflation risk. As markets begin to doubt the Fed’s ability to balance inflation and the economy, gold has strong potential to reach new record highs.
According to Jason Gozali, Head of Research at Pluang, besides gold there is silver, an investment asset where silver follows gold’s increase. As an industrial metal, per