Core PCE hit 0.36% month-over-month in January, pushing the annual rate to roughly 3.1%. That was before Iranian naval actions choked the Strait of Hormuz. Before oil crossed $100. Before gasoline climbed past $4. The inflation problem the Fed faces today did not arrive on a tanker. It was already here.
The Fed should hold rates at 3.50%-3.75% for the rest of 2026. Cutting into this environment would be a credibility mistake the committee cannot afford to make twice in 5 years.
The 1990 Analogy Has a Hole in It
The popular argument for cutting runs through Kuwait. Iraq invaded, oil doubled, the Fed eased, and the economy recovered. Clean story. But the starting conditions were different in a way that matters: core CPI in July 1990 was running at roughly 5%, and the Fed had been holding rates above 8% for over a year. The committee had room to cut because real rates were deeply positive. Policy was genuinely restrictive.
Today the fed funds rate sits at 3.50%-3.75% with core PCE at 3.1%. Real rates are barely positive. The Fed has less room to ease, and the inflation it would be easing into is stickier than the 1990 vintage. Services inflation, which the energy bulls want you to ignore, has been running above 4% for months. That is not a supply shock. That is domestic price pressure with its own momentum.
A family earning $85,000 with a 30-year mortgage at 6.8% on a $320,000 home pays roughly $2,090 a month. If the Fed cuts 50 basis points and mortgage rates eventually follow, that payment drops to about $2,000. Ninety dollars a month. Now consider that the same family is paying an extra $120 a month in gasoline and watching grocery prices climb as diesel-driven freight costs filter through supply chains. The rate cut does not solve the problem the family actually has. It just signals that the Fed has stopped fighting the one it can influence.
Second-Round Effects Are the Whole Game
Morgan Stanley's case for easing rests on the assumption that energy prices have limited pass-through to core inflation. That assumption deserves scrutiny. Airline fuel surcharges have already risen. UPS and FedEx have repriced ground shipping. Restaurant margins are compressing, which means menu prices follow. These are textbook second-round effects, and they do not reverse when oil retreats. They get baked into contracts, into wage negotiations, into the price expectations of every business that moves physical goods.
The bet that Brent retreats to $80 by year-end requires the Strait of Hormuz to reopen within roughly 6 weeks. Polymarket puts ceasefire odds at 2% for April 7 and 8% for April 15. Over $200 million in prediction market volume assigns 90% odds to U.S. forces entering Iran by December. The base case for oil normalization is not a base case. It is a hope.
I will grant the doves one thing: financial conditions have tightened meaningfully on their own. Morgan Stanley's estimate of 80 basis points of equivalent tightening from the stronger dollar, higher oil, and rising equity risk premiums is real. Markets are doing some of the Fed's work. But that is an argument for patience, not for preemptive easing. If conditions are already restrictive, the Fed can afford to wait and watch. It cannot afford to cut and be wrong.
Austan Goolsbee, who spent most of 2025 as one of the more dovish voices on the committee, now says the oil shock "starts pushing these decisions off to 2027 at the earliest." When the doves start hedging, pay attention.
The April 10 CPI report will likely show headline inflation near 3.1%, possibly higher. The temptation will be to call it transitory. The Fed used that word in 2021 and spent the next 2 years apologizing for it. Core PCE was already too high before the first barrel crossed $100. That is the number that should set policy. Everything else is narrative.
