The Federal Open Market Committee voted eleven to one on the eighteenth of March to hold the federal funds rate at 3.50 to 3.75 per cent, with Governor Stephen Miran dissenting in favour of a quarter-point cut. The decision came as Brent crude closed above $112 a barrel, having risen more than fifty per cent in a single month following the conflict with Iran and the effective closure of the Strait of Hormuz. Chairman Powell, in his post-meeting press conference, described the oil crisis as potentially having "only temporary economic effects," a characterisation that invited immediate comparison with the "transitory" inflation language of 2021.

The complication that distinguishes the present moment from previous oil shocks is the layering of tariff-driven inflation atop the energy price surge. Powell himself attributed between half and three-quarters of a percentage point of core inflation to tariffs, placing the core Personal Consumption Expenditures index at approximately three per cent. The Federal Reserve cannot cut rates to support an economy absorbing an energy shock without appearing to accommodate tariff-driven price increases; it cannot raise rates to combat inflation without inflicting further damage on growth already impaired by higher input costs.

The historical parallel that presents itself most naturally is that of Arthur Burns, who as Chairman of the Federal Reserve confronted the 1973 Arab oil embargo with a set of monetary instruments designed for demand management, not supply disruption. Burns chose accommodation, and the consequence was a decade of stagflation that required the subsequent and considerably more painful intervention of Paul Volcker to resolve. Powell has, thus far, chosen neither accommodation nor restriction but stasis, and the markets have responded by beginning to price the possibility of rate increases rather than the cuts that the dot plot continues to project.

The key variables to watch in the coming weeks are the duration of the Strait of Hormuz disruption, which analysts at Société Générale have warned could push oil to $150 a barrel if prolonged; the April consumer price data, which will provide the first full reading of the oil shock's pass-through to headline inflation; and whether the May FOMC meeting reveals any shift in the median rate projection. The deeper question, and the one that the Federal Reserve cannot answer through its conventional toolkit, is whether the political economy of the current tariff regime will permit a rate increase should one become necessary.

The full analysis, including a historical comparison of oil price shocks and Federal Reserve policy responses from 1973 to the present, is available in the Analysis section of this edition.