Longer-term concerns

Daily update

Attacks on Gulf energy infrastructure impacted financial markets. Investors have partially looked through short-term increases in energy prices, assuming consumers and businesses will find the means to adapt. Damaging infrastructure raises the risk of prices staying higher for longer, extending the damage beyond the ability of economies to adapt. US President Trump’s urgent social media posting on the attacks suggests some awareness of domestic economic and political costs, perhaps reinforcing investors’ probability of an early US withdrawal.
The Federal Reserve did not really surprise much, leaving interest rates unchanged (with only one dissent). The Fed seems prepared to look through oil prices if inflation expectations are contained (measuring those amidst fevered US partisanship is difficult). There was some focus on tariff impacts on goods prices. It is noticeable that things like trucking costs were rising before the war.
The Bank of Japan left rates unchanged. Japan has a history of collective community action when confronted by shocks, which might make its response to higher oil prices less conventional.
The ECB should continue with its policy of masterful inactivity on rates. The Bank of England is also expected to keep rates unchanged, but labor market data (higher employment but slower earnings growth) hints at the possibility of future cuts.