Tomorrow at 2:30 p.m., Jerome Powell will sing his swan song. That will be his last press conference after the latest FOMC meeting. The Senate Banking Committee is scheduled to confirm the nomination of Kevin Warsh to replace Powell tomorrow. The Senate could move to a final vote shortly thereafter.
Powell will likely explain why the FOMC is unlikely to lower the federal funds rate any time soon. Warsh has been calling on the Fed to do so as soon as possible. Powell will stress that inflation risks have increased, while unemployment risks have decreased.
On the inflation front, peace talks between the US and Iran have hit an impasse, causing Brent to surge back above $100 per barrel on Tuesday, with WTI crude close behind (chart). The longer negotiations remain stalled, the higher oil prices could go.
The key question is whether persistently high, or even higher, oil prices will bleed into underlying inflation? The answer will largely depend on whether the current energy shock triggers a wage-price spiral as it did in 2022 when oil prices spiked after Russia invaded Ukraine (chart). The inflationary spiral was exacerbated by global supply chain disruptions and very stimulative fiscal and monetary policies.
Will it be different this time? We think so. For starters, global supply chain disruptions are likely to be less severe this time despite the blockade of the Strait of Hormuz (chart). Before the war, 80%-85% of the oil that passed through the Strait was going to Asian markets, with India and China together accounting for 52% of the oil sourced from the Arabian Gulf. They are both getting more oil from Russia now.
