By: Editorial Team, StoneX Media
The arrival of a new leader at the Federal Reserve usually sets off a guessing game about where interest rates head next, and this transition is no exception. In his first meeting, Kevin Warsh signaled a determination to get inflation back to the 2% target, and investors read it as pointing toward a hike rather than a cut. With prices still well above that goal, the market has shifted from expecting cuts to weighing the odds of tightening. Energy costs are one swing factor in that math, capable of easing the pressure without resolving it on their own.
Jon Hilsenrath is a StoneX Senior Advisor who spent three decades covering economics and the Federal Reserve at The Wall Street Journal and wrote a biography of former Fed leader Janet Yellen. He covers Federal Reserve policy and the inflation data that drives it, the same forces now tying energy prices to the rate decision.
"The war in the Gulf looks like it's ending. Maybe that'll cause some relief on gasoline and oil prices", Hilsenrath notes, pointing to one route by which inflation could cool without any move from the central bank. A drop in energy costs would feed through to headline inflation and could spare officials a difficult hike. He frames the coming stretch as decisive, with the focus shifting away from the Federal Reserve and toward the incoming data. "We're heading into a really critical period, not necessarily for watching the fed, but for watching the economy and the inflation data".
Cheaper gasoline only helps so much, because the inflation problem reaches well beyond fuel. Hilsenrath points out that the measure stripping out energy is still running hot, which complicates any hope that a calmer Gulf fixes the picture on its own. "That takes out the oil story. And that's also elevated. That tells us that it's more than just this war in the Gulf", he explains. New chair Kevin Warsh is not leaning on that core reading anyway, instead weighing a broader set of gauges including median measures, the Consumer Price Index and the personal consumption expenditures index.
If energy costs do not fall far enough, the Federal Reserve may still reach for a small, insurance-style increase. Hilsenrath describes a scenario the market has not fully absorbed, where officials raise rates briefly and then reverse course. "Officials expect to raise rates a little bit this year and then cut them next year", he says, calling it a round trip ticket. In his view the central bank could lift rates to keep inflation on a downward path, then take those increases back once the data confirms it, which breaks from the market's habit of treating the Fed as an inertial institution. Energy relief could ease the case for that round trip, but it would not be the deciding factor on its own.
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--- Written by Gus Farrow, Senior Manager, StoneX TV
--- Expert: Jon Hilsenrath, StoneX Senior Advisor
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A cooling conflict in the Gulf and easing energy costs could hand the Federal Reserve a way to avoid raising interest rates. StoneX Senior Advisor Jon Hilsenrath breaks down why gasoline prices may decide whether inflation falls without a hike.
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