DTN Oil

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange fell sharply Thursday against a backdrop of a surging U.S. Dollar Index after Federal Reserve Chairman Jerome Powell signaled the central bank could start raising interest rates by smaller increments as soon as the next meeting, but the terminal rate would be higher than initially anticipated.

Investors, who had hoped for the central bank to hit pause on raising interest rates, were disappointed when Powell suggested the Federal Reserve is nowhere near the end of its fight against 40-year high inflation. The Federal Open Market Committee lifted the federal funds rate by 0.75% for the fourth consecutive meeting Wednesday to a target range of 3.75% to 4% -- the highest overnight bank borrowing rate since 2008.

In September, FOMC released its economic projections when the Fed committed to front-loading rate hikes with a terminal rate of 4.75% to 5% at the end of 2023.

"There are still some significant rate increases coming before we get to the level that is sufficiently restrictive," reiterated Powell during a news conference Wednesday afternoon, adding that "incoming data suggests no pattern of inflation coming down."

Equity futures on Wall Street extended losses into early trading Thursday, after Dow Jones Industrials plunged more than 500 points in reaction to Powell's remarks. The U.S. Dollar Index jumped more than 1.5% against a basket of foreign currencies to trade near 112.885 Thursday morning, pressuring the front-month West Texas Intermediate contract.

NYMEX December WTI slid $1.48 to trade near $88.50 barrel (bbl) after rallying more than $1.60 bbl in the previous session. January Brent, the international crude benchmark, fell $1.30 bbl to $94.84 bbl. NYMEX December RBOB futures dropped $0.0173 to $2.6783 gallon, and December ULSD futures pulled back $0.0225 to $3.6549 gallon.

Ahead of Powell's comments, equity markets rallied on speculation the central bank might announce a pivot in their fight against inflation. The speculation was reinforced by the FOMC statement that included new language of "cumulative tightening" and "lags with which monetary policy affects economic activity and inflation."

Typically, interest rate increases first affect financial conditions that, in turn, weigh on economic activity and price formation. There is no consensus on how long it will take before inflation begins to react to higher interest rates, but some economists suggest it could take anywhere between 12 and 16 months.

Economic data due out Thursday might shed more light on inflation and the health of the economy in recent weeks, with unemployment claims for the final week of October due out 8:30 a.m. EDT, followed by factory orders and services index from the Institute of Supply Management, both scheduled for release at 10 a.m. EDT.

Earlier this week, the Labor Department released its closely monitored Job Openings and Labor Turnover survey that showed new vacancies unexpectedly jumped by nearly 500,000 in September to 10.717 million after falling in August. There were roughly 1.9 open positions for every person looking for work in September, up from 1.7 in August.

At the same time, a closely watched gauge of manufacturing activity in the United States posted the slowest growth in 2-1/2 years in September, with prices paid by businesses for inputs sliding for the seventh consecutive month, according to the ISM.

Liubov Georges can be reached at Liubov.Georges@dtn.com