The truce agreement in the Middle East has temporarily eased global energy market concerns about the worst-case scenario, yet it hasn't really allowed the Federal Reserve to breathe easy on interest rates. For policymakers, the immediate challenge isn't the short-term dip in crude oil futures following the truce news, but rather that the previous energy shock has already begun infiltrating the transportation, manufacturing, and retail systems, potentially continuing to drive up U.S. inflation figures in the coming months. Reuters, citing American Automobile Association data, reported that as of April 8, the average gasoline retail price in the U.S. had risen to $4.16 to $4.18 per gallon, approaching recent highs; meanwhile, although oil prices have sharply fallen since the truce announcement, they remain about 30% to 40% higher than pre-war levels.
Energy Prices Rise First, Core Prices Follow
What makes this shock most concerning for the decision-makers is that the transmission of energy prices to overall prices does not quickly end with a short-term drop in oil prices. Similar to the slow recovery of supply chains post-pandemic and the experience of elevated global energy and transportation costs due to the 2022 Russia-Ukraine war, companies often absorb higher fuel and logistics costs first, then gradually pass the pressure on to end consumers. A Reuters Breakingviews commentary pointed out that the current Gulf conflict has set a "trap" for the Federal Reserve: even if future crude prices decline, prices in industries dependent on petroleum products may continue to rise. The Federal Reserve's March meeting minutes also indicated that some officials are concerned that high energy costs could further transmit to core inflation, hindering the process of bringing inflation back to the 2% target.
Expectations for Rate Cuts Become Fragile
The truce news once prompted traders to bet on the Federal Reserve resuming rate cuts in late 2026, but this bet soon became cautious. According to Reuters, the latest meeting minutes show that Federal Reserve officials are becoming increasingly vigilant about the inflation risks posed by the Middle East war, with some even reopening the option for rate hikes. The market still retains the possibility of rate cuts within the year, but both the scale and probability are significantly limited, with federal funds rate futures reflecting only limited room for easing. In other words, as long as the risk of energy supply is not completely eliminated, the "rate cut trade" prompted by the truce is more of a tactical correction than a trend reversal.
Supply Disruption Makes it Difficult for Oil Prices to Fall Significantly
More importantly, the truce does not mean the supply side has returned to normal. Reuters reports that the Strait of Hormuz has not yet fully resumed smooth passage, and shipping companies are still waiting for clearer transit and safety rules; even if some ships resume sailing, insurance, freight, and military risk premiums will continue to suppress the room for decline. Meanwhile, the conflict involving Iran has caused damage to regional energy facilities, with Qatar's liquefied natural gas output expected to decline by 17% over the next five years, meaning the pressure on the global natural gas and related industrial chains won't disappear in the short term. For global markets, given that the Strait of Hormuz involves about 20% of oil and natural gas transportation, any instability there makes it difficult for oil prices and inflation expectations to truly return to normalcy.
The Federal Reserve Faces a More Typical Stagflation Dilemma
This is precisely the combination the Federal Reserve least wants to encounter: growth may slow, but price pressures have not receded correspondingly. On April 6, IMF chief Kristalina Georgieva told Reuters that the Middle East war will lead to slower growth and higher inflation; even if the situation quickly eases, global growth forecasts may need to be revised downward, and inflation estimates adjusted upwards. For the United States, this means that if the energy shock continues to spill over, CPI and PCE in the coming months could face upward pressure, while employment and consumption might gradually cool due to high oil prices, high financing costs, and tightening financial conditions. The most challenging aspect for policymakers is not identifying the shock itself but deciding the next step when inflation and growth are under pressure simultaneously—whether to continue watching, delay rate cuts, or pivot to tighter measures if necessary.
Political Cycle Adds Complexity to Policy
This context could mean a tough environment for Federal Reserve Chairman nominee Kevin Warsh, should he be confirmed. According to Reuters Breakingviews, if confirmed, he may not be greeted by a stable energy market; instead, he may face a fragile truce, inflation spillover, and a White House hoping to see lower rates before midterm elections. For the Federal Reserve, this implies that the independence of monetary policy, tolerance of imported inflation, and responses to short-term growth slowdowns will be magnified and scrutinized by the market more than ever before.
