ABN AMRO economist Rogier Quaedvlieg describes the energy shock linked to the closure of the Strait of Hormuz as a cost-push shock that lifts US inflation while weakening growth. The bank expects the Federal Reserve to keep interest rates unchanged for an extended period while it assesses demand and inflation expectations. The report notes that inflation has not returned to target since the post-pandemic surge, and that household inflation expectations are volatile, while market pricing remains anchored. It says this could argue for tighter policy, but also leaves scope for a limited or no immediate change in rates.

Market Reaction And Fed Constraints

It adds that higher energy prices have already tightened financial conditions, with equities falling and the US dollar strengthening. It says further Fed tightening could add to these effects, reduce asset values, and curb consumption among higher-income households. Markets have priced in about a 0.9 percentage point rise in inflation since the first attack on Iran, while long-term inflation expectations have shown little change and remain near the lower end of the past two years’ range. The piece says the conflict is not expected to affect the next Fed meetings, where rates were already set to stay at current levels. A correction on 18 March at 12:47 GMT states Quaedvlieg works at ABN AMRO Bank, not ING. The article says it was produced with help from an AI tool and reviewed by an editor. The recent energy shock from the Strait of Hormuz closure presents a classic cost-push dilemma, boosting inflation while hurting growth. We’ve seen WTI crude futures surge over 25% in the last month, pushing last week’s February CPI to a worrying 3.8%. This puts the Federal Reserve in a difficult position, strengthening the case for keeping interest rates on hold for an extended period.

Implications For Traders And Volatility

We believe the Fed can get away with a limited response, or none at all, because the market is already doing the tightening for them. The S&P 500 has dropped nearly 8% since the conflict began, and a flight to safety has pushed the Dollar Index to a six-month high around 106.50. Further rate hikes could unnecessarily worsen these conditions and hit consumer spending, which is already showing weakness with the recent 0.6% fall in retail sales. The key will be watching inflation expectations, which the Fed fears could become unanchored. However, long-term market gauges remain stable, with the 5-year, 5-year forward inflation expectation rate holding near 2.3%, suggesting the market sees this spike as temporary. This gives the central bank cover to look through the immediate jump in headline inflation and wait for more data. From our perspective in 2026, we remember the Fed’s aggressive campaign against the demand-driven inflation of 2022 and 2023. This current situation is fundamentally different as it stems from a supply shock, making a hawkish response far riskier to the underlying economy. The 1970s showed us how trying to fight an oil shock with high rates can lead to severe recession. For derivative traders, this signals that rate-hike probabilities priced into the front end of the curve are likely too high. The Fed Funds futures market is implying a roughly 40% chance of a 25 basis point hike by the June meeting, which seems excessive given the growth risks. This suggests opportunities in selling out-of-the-money calls or constructing put spreads on SOFR futures to bet against a hawkish policy error. Volatility in interest rate markets, reflected in the MOVE index, has also spiked to levels not seen since last year. If the Fed successfully signals a patient, wait-and-see approach at its next meeting, this volatility is poised to decline. Short-volatility positions could become attractive as the market digests that the central bank is not on autopilot to hike. Create your live VT Markets account and start trading now.

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