Crude Oil Price: did 'inflection point' remark by Jay Powell, Fed Reserve Chief, affect the markets?


Inflection Point US Economy Fed Reserve

Those of us who are very much familiar with the terms such as inflation, growth and even the dreaded recession from economists during volatile periods, heard a less-familiar term on April, 4, from Jay Powell, the Chair of Fed Reserve.

Mr Powell, speaking on CBS’s 60 Minutes programme, said that the US economy is reaching what he called, ‘inflection point’.

No sooner had it become the focal point of his interview than media buzz continued hovering over it like a malfunctioning toy drone.

Inflection point or point of inflection is more of a math term than that of an economic, although the latter may have borrowed it from the former as it got some ingredients for a formidable soundbite.

In the field of calculus in math, it is a point on a curve where the gradient or slope is zero with the same thing on either side of the point having the same sign – either positive or negative.

With three simple steps in differentiation, a branch of calculus, it is easy to determine whether the curve in question has got a point of inflection that the economists like Mr Powell refers to as inflection point.

In order to produce the inflection point in the above animation, I used differentiation, along with little manipulation of algebra.

If that is the inflection point that Mr Powell meant, he got a point: the rate of growth did accelerate before it, thanks to the combination of vaccination rollout and of course, the unprecedented economic stimulus package.

When an economy follows this path, it is inevitable that it reaches a plateau – the worrying aspect that Mr Powell implied.

The Chair of the Fed Reserve thinks the US economy is heading toward this region of the curve, if it hasn’t reached there yet.

Mr Powell thinks that the new surges in infections is to blame for the risk; in addition, if the momentum of the vaccination rollout slows down, along with ignoring the social distancing measures and mask wearing, he thinks the US will stay at the plateau longer than it could afford to do so.

In short, it’s a form of warning against being complacent in light of the stimulus package.

Markets, including crude oil markets, perhaps, may have got the wind of this scenario during the last few weeks. Crude oil analysts, for example, were at a loss, when they could not account for the fall of oil price, when the factors in favour of the polar opposite were there for all to see.

Eventually, they settled for the Iranian Factor: the possibility of Iran entering crude oil markets with a bang.

It was short-lived, though.

No sooner had Iran unveiled its new uranium enrichment plant than it was subjected to what Iran called, ‘nuclear terrorism’; the facility lost its power supply due to a cyberattack; Iran blamed it on Israel and the latter did not deny it.

Crude oil markets saw it as an obstacle to steady supply from the volatile region and responded accordingly; the crude oil price went up by a moderate amount in the Asian markets - in the early hours – that continued into the day.

It’s highly unlikely that Iran and Israel will be caught up in a full-blown war over the incident; there had been much more serious form of ‘nuclear terrorism’ before in Iran: the same plant was hit by a mysterious fire a few months ago, resulting in extensive damage to it; the chief Iranian nuclear scientist was murdered at a location, a stone’s throw away from Tehran, Iranian capital, last year.

In this context, crude oil markets appeared to have just overreacted to the supply concerns over this issue; Mr Powell’s assertion has much more academic substance than misplaced emotions in order to gauge the movement of the oil price.

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