US | Oil shock is set to reinforce Fed caution on resuming easing

Summary

The FOMC will most likely keep the policy rate unchanged at 3.50%-3.75% while conveying a cautious approach in light of renewed risks; we do not expect a meaningful change in the median rate projection, even if inflation forecasts move somewhat higher.

Key points

• Key points:
• Intermeeting data showed that economic activity lost momentum late last year, contrary to earlier indications of particularly strong 4Q growth.
• Mixed labor market signals point to broadly stable but increasingly fragile conditions, likely keeping in focus downside risks to the Fed’s employment goal.
• Inflation data prior to the surge in oil prices suggested that tariff-related price pressures remained contained, although progress toward disinflation continues to be uneven.
• Financial markets have recently shifted to reflect increased geopolitical risks and greater uncertainty around the inflation outlook amid soaring oil prices.
• Fed funds futures point to limited room for additional rate cuts this year, reducing the need for Powell to stress upside inflation risks as strongly as in the last meeting.

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