The Middle East conflict will push up prices, but it will also likely harm US growth and job prospects. We see this as a Fed rate-cut delayed rather than removed story, unlike 2022 when a demand shock, combined with a supply shock, fuelled inflation and led to rate hikes.
Rising Inflation Constrains the Fed
The outlook for policy changes has been upended by events in the Middle East. Financial markets have swung from anticipating two 25bp this year to now pricing in barely one. Markets are solidly backing a no-change outcome on Wednesday, 18 March and we agree.
The military action in Iran and the resulting reluctance of shipping to navigate the Strait of Hormuz has led energy prices to spike higher. While the US itself gets very little crude oil from the Persian Gulf and is self-sufficient in natural gas, prices for oil are set globally. We are already seeing US retail gasoline prices up above $3.60 per gallon with the real prospect of the national average pushing imminently towards $4.25/gallon. This will put up supply and distribution costs, with airline fares also likely to push higher. The longer that the disruption lasts, the greater the chance it lifts prices in other sectors, including fertiliser, food prices and the cost of plastics. In consequence, we are now looking at inflation moving towards 3.5% by the summer, well above the 2% target.
The impact on growth and jobs is less clear-cut at this stage. The business surveys for February were at levels historically consistent with 3% growth, but the news on jobs is not as rosy. The February showed the economy shed 92,000 jobs with the rising to 4.4%, suggesting the Fed’s decision to remove the assessment that
Fed to Delay Rate Cuts as War Clouds the Outlook
