Brown Brothers Harriman’s Elias Haddad highlights that an escalating Iran war-driven energy shock, combined with a restrictive Federal Reserve and tightening bias at other central banks, is pressuring risk assets and supporting the Dollar. The FOMC delivered a hawkish hold, slashing rate cut expectations and nudging projections and the longer-term rate higher, keeping easing prospects limited.

Energy shock and Fed stance back Dollar

"Brent crude oil prices and natural gas prices in Europe spiked as the Iran war has escalated into additional direct strikes on energy infrastructure. An energy shock with no end in sight, a Fed staying restrictive, and other central banks on the cusp of tightening into soggy growth are a brutal combo for risk assets. Stocks and bonds are selling off while USD risk is skewed to the upside."

"FOMC delivered a hawkish hold yesterday. Fed funds futures slashed rate cut expectations from -60bps before the start of the Iran war on February 27 to just -9bps in the next twelve months."

"The FOMC reiterated that “uncertainty about the economic outlook remains elevated” but the updated economic projections downplay risk of stagflation. Real GDP growth was revised higher across the forecast horizon, reflecting confidence in productivity. Headline and core PCE inflation were both raised to 2.7% for 2026 but still converges to 2.0% by 2028."

"The dot plots continue to imply one cut for both 2026 and 2027, no change in 2028. But the distribution of dots for 2027 and 2028 tilted slightly more hawkish. The longer-term rate was raised to 3.125% vs 3.0% in December, which was in line with consensus."

"Finally, Fed Chair Jay Powell strongly suggested a high bar to resume easing stressing three key points: (i) “Fed sees current stance of policy as appropriate”, (ii) Think it’s important to keep rates mildly restrictive”, (iii) “Possibility that next move might be hike did come up.”"

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