Gas just crossed $4 a gallon nationally, up more than a dollar since the Iran war began disrupting the Strait of Hormuz. Markets have repriced from 2 expected rate cuts in January to zero. The consensus says the Fed is stuck. I think the consensus is wrong. The Fed should cut later this year, probably September, because this oil shock will weaken growth faster than it embeds inflation.
The distinction matters. Demand-driven inflation means the economy is running too hot: wages chasing prices, credit expanding, consumers spending freely. That calls for tighter policy. A supply shock is different. It acts as a tax. Every dollar a family spends on gasoline at $4 is a dollar not spent at a restaurant, a retailer, or on a streaming subscription. The mechanism is contractionary on its own.
1990 Called
We have a clean precedent. When Iraq invaded Kuwait in August 1990, oil prices doubled in 3 months. Headline CPI spiked above 6%. The Fed did not hike. It cut the funds rate from 8.25% to 6.75% over the following year as the economy slid into recession. The logic was straightforward: tightening into a supply shock compounds the demand destruction already underway.
Critics will note that core PCE sat at 3.1% in January 2026, before the oil surge. Fair point. The starting position is worse than ideal. But 3.1% core was already the backdrop when the FOMC's own dot plot projected at least 1 cut this year, and when Michelle Bowman projected 3. The pre-shock inflation picture did not prevent the committee from planning to ease. The shock itself should not change that calculus unless you believe energy prices will permanently embed in core, which brings us to the pass-through question.
Pass-Through Is Real but Slow
John Williams told Fox Business that energy costs spread into airfares, transport, and services over "months or maybe a year." He is right. But that timeline is the argument for patience on timing, not for abandoning cuts entirely. Goldman Sachs projects Brent retreating to $80 by year-end if Hormuz disruptions last roughly 6 weeks. If oil is back near pre-shock levels by Q4, the pass-through into core will be modest and fading by the time a September cut takes effect.
Austan Goolsbee warns against repeating the "team transitory" mistake of 2021. I respect the instinct. But 2021 was a demand boom layered on top of supply constraints, with M2 money supply up 27% in 2 years and fiscal stimulus flooding household balance sheets. None of those conditions exist today. Credit growth is tepid. Christopher Waller himself flagged labor market weakness as a reason to resume cutting "later this year."
Consider a household earning $75,000 with a $350,000 mortgage at 6.8%. Their monthly payment is roughly $2,285. A 50-basis-point cut by December would not directly change that fixed-rate payment, but it would ease auto loan rates, credit card APRs, and small business borrowing costs. For a family spending an extra $120 a month on gas, even marginal relief on revolving debt matters.
The real risk is not that the Fed cuts and inflation re-accelerates. The real risk is that the Fed holds too long, the oil tax drains consumer spending through Q2 and Q3, and by the time the committee moves, the labor market has deteriorated enough to require larger, more disruptive cuts. Alberto Musalem says policy is "well positioned." Positioned for what? A world where Brent was $75 and the Strait of Hormuz was open.
Goldman's David Mericle has the timing about right: September for the first cut, December for the second. That gives the Fed the March CPI data on April 10, the full Q2 earnings cycle, and several months to watch whether oil retreats as projected. It is not reckless. It is sequenced.
The April 10 CPI print will be ugly. Headline inflation may approach 4%. The temptation will be to treat that number as proof that cuts are off the table. But headline CPI driven by a geopolitical supply shock is not the same signal as broad-based price acceleration. The Fed knows this. The question is whether it has the nerve to act on what it knows, or whether it lets a war in the Persian Gulf set domestic monetary policy for the rest of the year.
