In light of the ongoing uncertainty surrounding the Iran war, now is not the time for the Fed to over commit, and we fully expect the FOMC to hold rates steady at its April meeting.
The energy price shock has already left its imprint on US inflation. Consumer prices rose by 0.9% MoM in March, the largest jump in almost four years,while the annual rate leapt to 3.3% - its highest level since May 2024. While the “full reopening”of the Strait of Hormuz should, in theory, alleviate upward pressure on inflation, a period of persistently elevated energy prices appears likely given that the Strait remains effectively impassable, and that a total resumption of traffic won’t occur overnight. Core inflation remains contained for now, and it will be awhile before we see any impact of the war on second order effects.
We expect Powell to strike a moderately more hawkish tone during his press conference given the upside risks to inflation posed by the war. As he did in March, he will probably frame the energy shock as a complicating factor, rather than necessarily a trigger for action,and we expect him to lean heavily into the “uncertainty”angle, as opposed to directly attempting to quantify the scale of the inflation spike. This, we believe, will help Powell to convey to markets a preparedness to act should inflation persist, while in tandem hinting at a baseline for an extended hold as the Fed assesses the impact of the war on the economy.
Get the full scoop on our April FOMC outlook by reading the analysis.
