“We had work to do before we had the oil price shock,” Daly told Reuters. “With the oil price shock, the work just takes longer. No one’s really sure how long that will last. (Oil shocks) push up inflation if they persist, and they will tug at growth, and what we would have to do as policymakers is balance those risks and make the best decision to get to both of our goals as quickly and easily as we can.”
Daly was unsurprised by the high CPI numbers and is hopeful that the tenuous ceasefire can lead to a lasting peace, which could bring oil prices back down.
“I think this is already showing through to the economy, and a higher CPI number will not be a surprise to anyone,” she said. “The new news is that it looks like the conflict could stabilize, and that the shipping lanes can open, and that we can start to return to something that looks more reasonable for people. But, you know, that’s the uncertain piece.”
Fed likely to wait and see
All of this uncertainty is likely to keep the Fed on the sidelines in the near future. Until there is a lasting peace in the Middle East and oil supply returns to its pre-war levels, the central bank will be wary that any cut could lead to higher inflation.
CME FedWatch, which uses the 30-day Fed Funds rate to predict future moves by the Federal Reserve, favors a rate hold into 2027. There is some uncertainty there as Kevin Warsh, if confirmed, will take over for Jerome Powell as Fed chair this summer. He will be tasked by the Trump administration to lower rates, so it will be his job to build a coalition on the Fed for that cause.
