ABN AMRO Bank economist Rogier Quaedvlieg argues that the latest energy shock, driven by the Strait of Hormuz closure, is a cost‑push shock that raises US inflation while weakening growth. The analyst expects the Federal Reserve to keep rates on hold for an extended period, using time to assess demand and inflation expectations.

Fed seen keeping rates on hold

"The inflation expectation channel seems especially important given the fact that inflation has still not returned to target after the post-pandemic inflation surge, and household expectations already are excessively volatile, even if market pricing remains anchored. This would advocate for a hawkish response. We think the Fed might get away with a limited response, or perhaps no response at all."

"The energy price spike has already led to a tightening of financial conditions. Equity markets have dropped on changing assessments of earnings and discount rates and the dollar has strengthened. Further tightening by the Fed could unintentionally compound these effects, eroding asset valuations and potentially curbing consumption among higher‑income households as well. This reinforces the case for caution."

"The Fed’s response function Of course, headline inflation moves immediately and sharply in response to the oil price shock. Markets have now priced in about an 0.9pp increase in inflation since the first attack on Iran. Central banks generally look through such first‑round effects. We judge it likely that the immediate consumption effect described above will outweigh the risk of second round effects, but the Fed will be weary of inflation expectations de-anchoring."

"On the other side of the coin, we’ve until now seen essentially no move in long-term inflation expectations, which remain at the lower end of the range of the past two years. In any case, we do not expect the conflict to have an impact on the upcoming meetings where the Fed was poised to keep rates at their current level. This will provide them with ample time to evaluate the various facets of the shock’s impact on the economy."

(This story was corrected on March 18 at 12:47 GMT to say that Rogier Quaedvlieg is an economist at ABN AMRO Bank, not ING.)

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)