Kaiyuan Securities: Middle East Situation Remains Tense, Test of U.S. Inflation May Come After March

Open Source Securities Research reports that the situation in the Middle East remains tense, and rising crude oil prices could push up U.S. inflation, potentially causing an unexpected rebound in inflation later on. In the medium to long term, this may lead the Federal Reserve to adopt a wait-and-see approach for a longer period.

Specifically: First, the U.S.-Israel military strikes against Iran are still ongoing, and the Strait of Hormuz remains effectively blocked, leading to a significant increase in global oil prices, which could impact U.S. inflation levels. According to Fed Chair Jerome Powell’s statement to Congress in March 2022, based on empirical rules, a $10 increase in the price per barrel of oil results in a 0.2% rise in U.S. inflation and a 0.1% decrease in economic growth. In August 2024, Fed research found that a $45 increase in oil prices caused U.S. inflation to rise by about 0.5% for the year, with an impact of approximately 0.17% on core inflation. As of March 10, global oil prices have risen by about $16 per barrel. Considering the ongoing conflict, oil prices may remain high for some time, and U.S. inflation could experience an unexpected rebound in March, with a real inflation test likely to occur then.

Second, in the short term, this is unlikely to affect the Fed’s decisions, but in the medium to long term, it may lead the Fed to wait longer before acting. For the Fed, since U.S. inflation is still on a downward trend, although the war introduces many uncertainties and keeps oil prices in focus, the short-term impact on its decision-making is limited. In the medium to long term, if oil prices stay high, the Fed might choose to remain on hold longer.

Under the baseline scenario, we believe the Fed may cut interest rates once or twice by 2026, mainly after the new chair takes office in the second half of 2026.

(Source: First Financial)