Key Events of the Week

1. Powell Signals a Pause: Energy Shock Does Not Change the Rate Path; Inflation Expectations Become a Red Line
Against the backdrop of the situation in the Middle East worsening and sharp fluctuations in energy prices, disagreements within the Federal Reserve over the trajectory of monetary policy have again come to the surface.

On Monday, Fed Chair Powell, in a speech at Harvard, clearly laid out the regulator’s main position: during short-term inflation pressure caused by an energy shock, the Fed is inclined to keep rates unchanged and to observe changes in prices “through the prism.”

This “dovish” statement quickly adjusted the previous aggressive expectations for rate hikes and brought the market back to expectations of rate cuts in the future. However, on Friday, strong employment data again cooled expectations for rate cuts by 2026. In March, the US added 178,000 jobs (against an expected 60,000), which was the highest level since December 2024; the unemployment rate fell to 4.3%, and wage growth slowed to 3.5%. The main factors were the end of healthcare strikes and warmer weather.

The so-called “through observation” means perceiving the rise in energy prices as a short-term supply shock and not using it as a direct basis for changing policy. Powell stressed that such shocks are usually limited in duration, and that transmitting the impulse from monetary policy takes time, making timely reaction to such fluctuations difficult. Therefore, hasty changes can amplify the risks of moving in the wrong direction.

At the same time, Powell outlined clear policy limits. He emphasized that if inflation starts to affect society’s long-term expectations, the Fed will have to act. Inflation remained above target for five years, making it hard for companies and households to remain indifferent to the new round of rising prices. He pointed out that recurring shocks can lead to the formation of higher inflation expectations and exert a lasting influence on the pricing mechanism.

Overall, this position is broadly consistent with the view of New York Fed Chair Williams. He noted that the conflict in the Middle East is already affecting the US economy through supply chains and energy pricing, and forecast that inflation would reach 2.75% by the end of 2026. Nevertheless, he believes the rate level is still “adequate,” and he advises the Fed to maintain policy stability while projecting economic growth of 2.5% this year and only a slight decrease in the unemployment rate.

Alongside this, within the Fed, there are also more moderate and more cautious views. Board member Millan continues to insist on cutting rates, believing that in the absence of a long-term inflation surge, policy should not take into account current fluctuations in energy prices, and he allows for a 100-basis-point rate cut over the course of the year.

In contrast, Kansas City Fed President Schmidt warns that the long-lasting impact of an energy-price surge on inflation cannot be underestimated. In a high-inflation environment, it is dangerous to treat oil price increases as a temporary phenomenon—there is a risk of forming persistent inflation around 3%.

St. Louis Fed President Musalem takes a more neutral stance. He believes the current level of rates is sufficient to respond to economic risks, there is no need for short-term adjustment, but if the economy changes, he will support changing rates in either direction.

2. Escalation of the US–Israel–Iran Conflict: Trump Is Not TACO; Iran Plans to Charge for the Strait of Hormuz
Over the past week, the situation in the Middle East has sharply worsened due to the continuing standoff among the US, Israel, and Iran. A conflict that began in the realm of military actions has started to move into the energy, shipping, and regional arenas, and the Strait of Hormuz has remained the key point of contention between the parties.

On the battlefield, there is clear escalation of reciprocal strikes between Iran and the US–Israeli bloc. Iran carried out more than 90 cycles of the operation Иран операцию «Реальное обязательство-4», striking US bases, Israeli defense facilities, as well as energy and metallurgical sites with missiles and drones, while claiming an expansion of the strike zone and accelerating the expulsion of US forces from the Middle East.

Within Iran, serious damage has been inflicted on infrastructure: landmark bridges have been destroyed, the steel plant in Isfahan sits idle, meteorological and pharmaceutical facilities have been affected, and some regions have faced power-supply disruptions. According to Iran, more than 115,000 civilian facilities have been damaged.

The US and Israel continue intense military pressure. The US has carried out strikes on more than 11,000 targets in Iran, continues to build up troops in the Middle East, including redeploying A-10 attack aircraft and aircraft carrier groups. Israel has used around 16,000 munitions, destroyed thousands of targets, and is also conducting strikes against Hezbollah in Lebanon. Although Israel estimates that Iran’s missile strike capabilities and command-and-control system have been undermined, there are problems with shortages of resources.

Political disagreements are also mounting. US President Trump says the military phase will end soon, sometimes claiming that the regime in Iran has already changed, but at the same time he promises to intensify strikes in the coming weeks and threatens to destroy Iran’s key infrastructure. Iran categorically denies any intention to hold a ceasefire, insists on a “complete cessation of the war,” and demands security guarantees against attacks. The sides’ positions on negotiations and war goals differ radically.

Control of the Strait of Hormuz has become a key element of the conflict. Iran has repeatedly threatened to restrict passage, initiated laws to collect transit fees, and is negotiating with Oman on an agreement. Despite promises to guarantee safe passage for certain countries, Iran makes it clear that the strait will not return to the pre-war regime.

International efforts around the strait are intensifying. The UK plans to gather allies to discuss military scenarios, and the EU calls for expanding maritime patrols to protect key trade routes. At the same time, the UAE is considering the possibility of a joint attempt with the US to force passage through the strait, creating a threat of Gulf countries being drawn into a direct conflict. Several European countries are skeptical of US actions, refusing to provide airspace and bases.

External effects of the conflict are showing up in other areas as well. Energy and industrial facilities in the Middle East are often targeted: the UAE’s largest aluminum plant has been forced to shut down; tankers and airports have been hit. The global security system is also malfunctioning: within NATO, disagreements arise over US policy, and European leaders openly question the appropriateness of military and political decisions.