The fog of war is back. Oil prices jumped today after Israel attacked Iran's largest gas processing facility. Iran's Revolutionary Guard threatened to strike oil facilities in Saudi Arabia, the United Arab Emirates, and Qatar. Qatar then reported that Iranian missile strikes had damaged a key liquefied natural gas export facility.
Early this morning at 2:17 a.m. EST, the price of a barrel of Brent crude oil was around $100. It rose to about $110 by 2:00 pm, just as the FOMC announced that the federal funds rate would remain unchanged. Thirty minutes later, Fed Chair Jerome Powell started his press conference. He was neither hawkish nor dovish. The odds of two widely expected rate cuts this year declined, while the odds of a rate hike increased, according to the Atlanta Fed’s Market Probability Tracker. We remain in the none-and-done camp.
The S&P 500 fell 91.39 points today, with 57.42 points of that decline occurring after 2:00 pm, leaving the index slightly below its 200-day moving average (chart). The combination of war and Fed news triggered a taper tantrum in the stock market as investors concluded that monetary policy may be limited in its ability to address the war's economic consequences. Indeed, Fed Chair Jerome Powell barely mentioned the war. Notably, he opined that the economy and labor markets are in good shape and that core inflation is likely to moderate in the coming months, implying the Fed will remain on pause for the foreseeable future.
In his presser, Powell did not mention that today's February PPI report showed a 0.7% m/m increase, the third consecutive hotter-than-expected reading (chart). March's PPI will be even hotter due to the war.
However, Powell focused on consumer price inflation excluding food and energy. He emphasized that core consumer goods inflation (especially durable goods) had been boosted by Trump's tariffs and that their inflationary impact should diminish in the coming months (chart). He appears to be looking beyond the inflationary shocks in oil, aluminum, and fertilizer prices stemming from the war (chart).
Powell offered a glass-half-full interpretation of the labor market data released so far this year, despite weaker job growth and a rise in unemployment in February. In his view, both labor demand and supply are falling simultaneously. Powell seems comfortable with the net outcome, noting that with the unemployment rate at 4.4%, the labor market is neither overheated nor in distress.
Turning to the updated Summary of Economic Projections (SEP), the changes were modest. For 2026, the FOMC's median headline PCED inflation forecast was revised up to 2.7% from 2.4%, core PCED to 2.7% from 2.5%, and GDP was nudged higher to 2.4%. This is fundamentally an SEP that reflects the state of the economy prior to the latest conflict in the Middle East. Given the inherent uncertainty around the duration and economic impact of the war, it would have been premature, and arguably misleading, to embed its effects more aggressively into the SEP. Powell specifically noted that "this is one of the SEPs where a number of people mentioned if we were ever to skip an SEP, this is a good one [to skip]. We just don't know."
The March SEP also shows that the long-run growth forecast for the US economy was revised higher, from 1.8% to 2.0% (chart). Powell attributed this to productivity gains, noting that sustained productivity growth above 2% is historically unusual and that AI investment is increasingly visible in the real economy. This aligns with our Roaring 2020s scenario, in which technology-driven productivity growth raises real GDP growth while moderating inflation.
So what about the taper tantrum? We anticipated that the first half of 2026 would be choppy. We didn't foresee the war, though we did warn that the risks to our upbeat outlook were mostly geopolitical. The market will likely remain choppy until the fog of war lifts.
The Bull/Bear Ratio (BBR) we monitor fell to 1.94 this past week (chart). That's increasingly bullish from a contrarian perspective. However, it has worked best in the past when it fell below 1.00 because such bearish sentiment typically triggered a Fed Put. This time around, the Fed may be trapped between Iran and a hard place. BBR readings around here or lower could signal a compelling buying opportunity if foreign policy succeeds in lifting the fog of war sooner rather than later.
