A new study from the Boston Fed argues that the U.S. economy has changed in a fundamental way: oil price shocks no longer inflict the same damage on employment, even though they still feed inflation. The result cuts the odds of a repeat of 1970s-style stagflation, but it also suggests that price pressure from energy can linger longer than many expect.
A 33% oil shock no longer hits jobs like it did in the 1970s
The report, published on June 4 under the title Reassessing the U.S. Economy’s Vulnerability to Oil Shocks, compares the current economy with the 1970s and 1980s. Back then, a 33% oil price shock would reduce nationwide employment growth by about 1.8 percentage points within a year. In the more recent U.S. economy, the same shock has an effect that is close to zero.
The study ties that shift to two structural changes: much stronger domestic crude production and better energy efficiency across the economy. Axios cited the research team as finding that, under a shock similar to the current one, Texas could see relative employment growth rise by about 1.7 percentage points, while Massachusetts could fall by around 0.4 percentage points. Gains in oil-producing states offset some of the pain elsewhere, leaving aggregate employment largely unchanged.
Inflation still rises, with PCE up about 1.5 percentage points
The labor market’s resilience does not mean oil shocks have lost their macro impact. The same 33% shock that once pushed the PCE price index up by about 2.2 percentage points in the 1970s would still lift it by roughly 1.5 percentage points today.
That is the key policy implication in the report. If oil spikes no longer threaten employment growth in the same way, the Federal Reserve does not face the old trade-off as sharply as it once did. The pressure shifts. Instead of fearing an immediate recessionary hit from energy prices, policymakers may need to focus more directly on inflation that proves harder to bring back down.
Morgan Stanley sees no rate moves in 2026
Morgan Stanley describes the current oil move as a short-term supply disruption. Its forecast puts Brent crude at an average of $110 in Q2, easing to $100 in Q3, then falling to $80 in 2027. The bank also said exports through the Strait of Hormuz have been gradually recovering and are expected to return to steady-state levels before October.
Based on that view, Morgan Stanley expects the Fed to keep rates unchanged through 2026 at 3.50% to 3.75%, followed by 25 basis point cuts in March and June 2027. In that framework, oil is not the core factor that would force rate hikes, but it does raise the bar for easing.
Kevin Warsh’s first FOMC meeting comes with a hawkish backdrop
The June 16-17 FOMC meeting will be the first chaired by Kevin Warsh after he took office on May 22. Prediction markets point overwhelmingly to no change, with odds around 97.8%.
Still, holding rates steady does not mean the signal is soft. According to the source material, minutes from the April FOMC meeting showed a clearer hawkish turn, with most officials leaning toward removing an easing bias and stating that another hike could not be ruled out if inflation stays above the 2% target. Kalshi data put the probability of a rate hike before July 2027 at 63%, while Polymarket shows roughly a 35% chance of a hike during 2026.
Taken together, the Boston Fed study and market pricing point in the same direction: oil shocks no longer break the U.S. labor market the way they once did, but they still keep inflation elevated. That shift helps explain why expectations for future rate cuts remain restrained.