Policy responses

Daily update

An Israeli-Lebanon ceasefire has been agreed, lessening the risks to a wider peace settlement in the region. US President Trump asserted (without offering evidence) that a peace deal with Iran is looking “very good” and Iran was agreeing to US terms. Markets have been unwilling to price in that assertion in the absence of confirmation from alternative sources.
Aside from Gulf news, markets have central bankers talking about the consequences of events in the Gulf. We have already heard from Bank of England Governor Bailey earlier this week, forced to do penance for an excessively hawkish tone at the last policy meeting. Chief Economist Pill should echo the idea that central banks only need focus on second round effects.
ECB Chief Economist Lane noted that decisive effects from the war are not yet evident. It is too soon to expect to see any second round effects, and thus too soon to expect central banks to be signaling change.
US policy is more complicated. Tariff effects should naturally fade from inflation, but gasoline prices rising by over a third kept the affordability crisis (and associated inflation expectations) prominent. However, US households seem to lack the power to do anything about those inflation perceptions (at least until the mid-term elections).