Fed: ABN AMRO considers a dovish pause to be justified

ABN AMRO Economist: Energy Shock Likely to Lift US Inflation, Slow Growth

According to Rogier Quaedvlieg, an economist at ABN AMRO Bank, the recent surge in energy prices—sparked by the closure of the Strait of Hormuz—represents a cost-push shock that is expected to drive US inflation higher while dampening economic growth. Quaedvlieg anticipates that the Federal Reserve will maintain its current interest rates for a prolonged period, allowing time to monitor shifts in demand and inflation expectations.

Federal Reserve Expected to Maintain Current Rates

Quaedvlieg highlights the significance of inflation expectations, noting that inflation has yet to return to its pre-pandemic target and that household expectations remain highly volatile, even as market-based measures are stable. This situation could justify a more hawkish stance from the Fed. However, he suggests that the Federal Reserve may opt for only a modest response—or potentially no immediate action at all.

The recent spike in energy costs has already contributed to tighter financial conditions. Stock markets have declined amid shifting outlooks for earnings and interest rates, while the US dollar has appreciated. Additional tightening by the Fed could intensify these trends, potentially reducing asset values and curbing spending among wealthier households. This underscores the need for a cautious approach.

Headline inflation typically reacts quickly and sharply to oil price shocks. Since the initial incident involving Iran, markets have factored in an approximate 0.9 percentage point rise in inflation. Central banks often look past these initial effects. Quaedvlieg believes that the immediate impact on consumer spending is likely to outweigh the risk of longer-term inflationary pressures, though the Fed will remain vigilant about the possibility of inflation expectations becoming unanchored.

On the other hand, long-term inflation expectations have shown little movement and remain at the lower end of their two-year range. Quaedvlieg does not foresee the current conflict affecting the Fed’s upcoming meetings, where rates are expected to remain unchanged. This pause will give policymakers time to thoroughly assess the broader economic implications of the energy shock.

Correction issued March 18 at 12:47 GMT（UTC+8）: Rogier Quaedvlieg is an economist at ABN AMRO Bank, not ING.

This article was produced with the assistance of artificial intelligence and reviewed by an editor.