FOMC Preview: Strait Outta Options

The Federal Open Market Committee is set to keep its policy rate on hold at an upper bound of 3.75%. This would be the second consecutive meeting in which the FOMC kept rates on hold. The intermeeting period brought even more uncertainty, with the resumption of tariff drama, and most significantly, the war in Iran. The war should provoke a stagflationary impulse, with consumer demand dampened while headline inflation rises. This leaves the FOMC with little choice but to remain on hold until it is evident which – growth or inflation – is damaged more significantly before adjusting the policy rate. The duration and magnitude of the war, the closure of the Strait of Hormuz and the impact of energy and other cargo will weigh heavily on the decision-making calculus of the Fed and only add to the foggy policy outlook in the months ahead.