Powell Kept an Agnostic View on the (Persistence, Duration of) Current Developments.

Markets

Yesterday saw a new escalation in attacks on oil infrastructure in the Middle East with a sharp rise in energy prices that dominated global markets. Iran attacked Qatar’s Ras Laffan gas infrastructure after Israël attacked Iran’s main South Pars gas field. Natural gas and oil prices (Brent $110+ levels) already jumped sharply higher before the Fed policy decision. The Fed as expected left its policy rate unchanged at 3.5-3.75%. Fed chair Powell at the press conference gave little guidance on the impact of the Middle East conflict on activity and inflation. Forward guidance is dead, at least for now. The Fed still published a new dot plot summarizing assessments from the individual Fed governors. The median dots were raised both for economic growth (2026 2.4% from 2.3%; 2027 2.3% from 2%, 2028 2.1% from 1.9%) and PCE inflation (2026 2.7% from 2.4%, 20272.2% from 2.1%; 2028 2% unchanged), but Powell stressed that these view have far less relevance than is otherwise in current environment. The median path for the Fed rate path still sees 1 additional 25 bps rate cut this and next year. Powell kept an agnostic view on the (persistence, duration of) current developments. An oil price shock might be a one-off, but the Fed will closely monitor the impact on inflation expectations. With respect to (current) inflation developments, Powell extensively elaborated on the pass-through of higher tariffs on goods inflation. Powell also indicated he intends to stay at the central bank until the DOJ investigation is completed. He wants to continue to serve as Fed chair temporarily if his successor is not confirmed by the end of this term. He hasn’t decided anything on whether he will continue to term as governor. Markets didn’t join the neutral, ‘agnostic’ attitude from the chair and mainly reacted to sharply higher energy prices causing further bear flattening (US 2-y +9.9 bps , 30-y + 4 bps). Despite Powell’s balanced assessment markets reduced the chance of a 2026 rate cut to <50%. US equities tumbled (S&P -1.36%). The dollar regained the upper hand (EUR/USD close 1.1452; USD/JPY 159.86). German yields, (closed before a late session upleg in the oil price) added between +6.1 bp (2-y) and +0.2 bps.

The energy-stagflation trade (Brent oil $113 p/b, European gas price opens 27% higher) still dominates global trading this morning with a further rise in (ST) yields, a new sharp downleg in Asian equities (Nikkei -3.38%) and a stronger dollar (DXY 100.21, EUR/USD 1.1455). We’re now going into the policy decisions of the ECB, the Bank of England the Riksbank, the Swiss National bank and the Czech national bank. Markets will especially look out for the ECB reaction function to current energy price shock. They currently fully discount a June rate hike and more than a second additional 25 bps step EoY. The 2-y swap yield jumps another 8.5 bps this morning (2.72%). Lagarde already indicated that the ECB considered some scenario analyses aside from the regular forecast update. Markets at least price that the new energy shock will warrant decisive action in the near future and are keen to see any concrete commitment from the ECB to prevent a 2022/23 pass through to second round effects. Whatever the ECB assessment, the market reaction function to higher oil prices/stagflation risk is clear.

News & Views

The Bank of Japan kept its policy rate unchanged at 0.75%. Board member Takata dissented like he did in January, in favour of a 25 bps rate hike, in a 8-1 majority vote. Hawkish tweaks to the policy statement included the need to monitor how higher oil prices could affect underlying inflation. The bank probably means upside inflation risks as the statement makes no explicit mention of downside growth risks stemming from elevated energy prices. The BoJ also expects medium and long term inflation expectations to rise, with the effects of a positive wage-price spiral adding to this view. It reiterates that if the outlook for economic activity and prices presented in the January Outlook is realized, the bank will continue raising the policy rate. We believe these conditions will be met in April, when the BoJ meets next. BoJ governor Ueda at the press conference did nothing to push back against market expectations.

February Australian employment data showed a consensus-beating 48.9 net job gain (vs 20k). Details were less encouraging with full time occupations falling by 30.5 k and the increase being due to higher levels of part-time employment (+79.4k). The unemployment rate unexpectedly moved from 4.1% to 4.3% but was backed by a higher participation rate (66.9% from 66.7%). Stats New Zealand reported 0.2% Q/Q growth in the December 2025 quarter (down from 0.9% Q/Q and below 0.4% consensus). Details showed especially government consumption contributing positively (+2.5%) with gross fixed capital formation declining (2.2%) and household consumption stabilizing at best.