Fmr. Boston Fed Pres.: Until the Strait of Hormuz fully opens there will still be oil supply shock

Summary

• Former Boston Fed President Eric Rosengren argues the oil supply shock from Middle East conflict is likely to be "fairly persistent."
• The key condition for relief is the full reopening of the Strait of Hormuz to pre-war traffic levels, which has not happened after six weeks of disruption.
• Even after normalization, the need to rebuild destroyed energy infrastructure in the region will prolong the supply impact.
• The shock extends beyond crude oil to other oil-based products, citing notably expensive air travel (e.g., plane tickets to California) as a tangible example.
• This persistent supply shock will feed into inflation, leading him to expect core PCE inflation numbers to "stay at 3% or higher" in upcoming reports.
• This inflationary impulse creates a "difficult place for the FOMC," making it hard for the committee to justify lowering interest rates.
• He does not foresee the Fed cutting rates until the fall, at the earliest, due to the need for more certainty that core inflation is drifting down.
• He references the March FOMC meeting, noting that 7 members wanted no cuts this year and 7 wanted only one cut, indicating a pre-existing hawkish tilt before the full scale of the oil shock was known.
• The recent strong employment report has lessened the perceived downside risks to the economy and employment from the Fed's perspective.
• The main uncertainty is the duration of the supply disruption and the subsequent pace of infrastructure repair in the Middle East.