The current oil shock is wreaking havoc on global markets as investors scramble to price its implications, selling first and asking questions later. Yet much of the economic debate fails to grasp how it interacts with

U.S. Federal Reserve

policy, political pressure and global capital flows, resulting in misjudgments that matter enormously for markets and economies.

Historically, the commonly observed pattern of rising

oil prices

alongside a weaker U.S. dollar tends to occur during demand‑driven oil rallies. In those environments, stronger global growth, improving risk appetite and capital flows into non‑U.S. assets dominate. Oil rises as part of a broader “risk‑on” cycle, while the dollar often softens as investors rotate toward cyclical, emerging‑market and commodity‑linked currencies. In other words, the negative correlation between oil and the U.S. dollar is often a byproduct of shared demand and risk conditions rather than a mechanical pricing rule.

By contrast, supply‑driven oil shocks can produce the opposite outcome: oil prices and the U.S. dollar rising together, as we are currently witnessing. In these episodes, higher oil prices tighten global financial conditions, raise inflation risk and increase uncertainty, driving safe‑haven flows into the dollar and pushing U.S. yields higher as markets price a “higher‑for‑longer” policy path.

Gold

can also come under pressure as countries seek dollar liquidity to offset the impact of higher oil prices priced in U.S. dollars. This renewed strength in the dollar, paired with higher yields, also runs counter to Donald Trump’s administration’s stated objective of a weaker currency to improve the U.S. trade balance and lower rates to fund its large deficit.

Against that backdrop, last week’s Federal Open Market Committee (FOMC) meeting reinforced market expectations that near‑term U.S. central bank rate cuts are unlikely, contributing to a stronger U.S. dollar and a recent pullback in gold.

Indeed, the FOMC, which as part of the U.S. Federal Reserve sets U.S. monetary policy, voted to keep interest rates unchanged Wednesday. In our view at TriVest Wealth Counsel, markets are reacting to an overly hawkish policy path pricing in a prolonged period of restrictive policy that is increasingly at odds with underlying growth dynamics, particularly in the context of an ongoing supply-driven oil shock that if it continues risks sending global economies into a full-blown

recession

.

At today’s consumption rates, the recent increase in gasoline prices following the oil supply shock has imposed an estimated US$300–US$350 million per day “tax” on U.S. consumers, according to Patrick De Haan, head of petroleum analysis at GasBuddy. On an annualized basis, that drag is comparable in magnitude to the economic impact of a roughly 50‑basis‑point rate hike, though it operates through household cash flows rather than financial conditions. Importantly, higher gasoline prices fall disproportionately on lower‑ and middle‑income households, directly eroding purchasing power and reinforcing late‑cycle downward growth pressures even as headline inflation temporarily rises.

Oil shocks, however, do not by themselves dictate Federal Reserve policy. They matter only to the extent that they generate second‑round inflation effects specifically through wages and inflation expectations. History makes this distinction quite clear.

This is not the 1970s, when inflation expectations were unanchored and wage contracts were routinely indexed through cost‑of‑living adjustments (COLAs). In that environment, oil shocks fed directly into self‑reinforcing wage‑price spirals, forcing the Federal Reserve to tighten aggressively even as the economy slid into recession following the 1973–74 OPEC oil embargo and the 1978–80 Iranian Revolution.

By contrast, during the 1990 Gulf War oil shock, the Fed largely looked through the energy‑driven spike in prices, eased policy as growth weakened, and explicitly avoided tightening into a supply shock. The result was a relatively mild recession, with higher energy prices failing to become embedded in broader inflation.

A similar framework applied during the 2007–08 oil shock. Crude prices surged to US$147 per barrel amid strong global demand and financial excess. Headline inflation rose sharply but core inflation and wage growth remained contained. As financial stress intensified, the Fed cut rates aggressively and deployed emergency liquidity facilities rather than tightening in response to oil‑driven inflation.

The consistent lesson is that when inflation expectations remain anchored and growth risks dominate, the Fed has historically looked through headline inflation caused by oil, prioritizing financial stability and economic growth over a mechanical response to supply‑driven price shocks.

This time, however, the Fed appears to be taking a different approach, underestimating the economic drag created by the supply shock itself. That misreading matters because U.S. monetary policy anchors global financial conditions: the U.S. dollar remains the world’s reserve currency, U.S. Treasuries are the benchmark “risk‑free” asset, and gold — priced in U.S. dollars — is highly sensitive to shifts in real yields and Fed policy expectations. When the Fed remains restrictive into a supply shock, that pressure is transmitted globally, forcing other countries to tighten financial conditions or sell assets, including gold, to defend currencies and fund deficits.

A more proactive Federal Reserve response would help limit the risk of a full‑blown economic contraction and prove supportive for assets such as gold that are currently absorbing the consequences of policy miscalculation. Historically, gold has performed well — and

bonds

poorly — when inflation expectations remain anchored but real growth softens, as seen after the 1990 Gulf War and during the oil‑driven inflation surge of 2007–08 ahead of the financial‑crisis unwind.

Those episodes, however, were marked by a Fed willing to adapt policy as conditions deteriorated. Persisting with an overly restrictive stance today risks engineering recession alongside elevated energy prices — a classic stagflationary mistake.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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