The Fed shouldn't respond to this energy shock the same way it did in 2022: JPMorgan's Kelsey Berro

Summary

• The Fed is facing a likely record energy shock, but the starting economic conditions are vastly different from the 2022 Russia/Ukraine shock.
• In 2022, the Fed hiked because inflation was already at 7%, GDP was in double digits, and the real policy rate was significantly negative.
• Today, CPI is around 2.5%, GDP is about 5%, and the real policy rate is modestly restrictive, arguing against a 2022-style hiking response.
• The key risk balance shows 16 of 19 Fed participants see upside risks to both their inflation forecasts and to unemployment, signaling growth/labor market risks.
• The market has reacted to the first-order inflation impact (higher yields, front-end breakevens), but has not fully priced potential second-round growth impacts.
• Long-term inflation expectations remain anchored, with the 10-year Treasury yield stable around 4.25%, signaling the market views this as either short-lived or a stagflationary mix.
• The primary takeaway is the Fed should not hike; the next move is more likely to be a cut, driven by weaker growth/labor market outcomes winning out over inflation, similar to a past tariff-driven supply shock.
• The S&P 500 is only down ~4% from its high, indicating overall market calm and a warning against overreacting to daily news headlines.