The oil shock has increased the risk of stagflation in the US. This is a problem for the Fed - Apollo

The jump in oil prices after mutual strikes between Israel and Iran has increased the risks of stagflation in the US - a situation in which prices rise and the economy slows down, Apollo Global Management warned. According to one of the largest U.S. investment firms, the Fed now faces a difficult choice: fight inflation with high rates or support the economy by easing monetary policy.

«According to the Fed's model, a sustained $10 increase in oil prices would increase U.S. inflation by 0.4% and decrease GDP by 0.4%. Duties also increase inflation and slow GDP growth. Immigration restrictions, in turn, increase wage inflation and reduce job growth. Thus, higher oil prices exacerbate the current stagflationary shock caused by duties and immigration restrictions,» announced Apollo chief economist Thorsten Slok.

He said the heightened risks of stagflation in the US are a major concern for the US central bank ahead of its meeting this week. «High inflation indicates the need to raise the interest rate. Slowing GDP growth, on the contrary, suggests the need to lower it. The question is what will the regulator pay more attention to - rising inflationary pressures or the coming slowdown in growth?» — написал Слок.

Wall Street believes the Fed will leave the interest rate unchanged at 4.25-4.5% at the end of its June 18 meeting. The main question for investors is when the decline will begin, writes The Wall Street Journal. The publication notes that following the release of weak inflation data - both consumer and manufacturing - many analysts have revised their forecasts in favor of an earlier start to the rate-cutting cycle. According to LSEG, markets are fully pricing in a rate cut in October, but there is a high probability that it will happen even earlier - in September. Previously, markets did not expect a rate cut earlier than December, the article says.

Citi believes that the market is underestimating the likelihood of a rate cut. The bank points to the fact that core inflation in the U.S. is slowing and jobless claims are rising - indicating a cooling labor market.

However, new duties and geopolitical risks could delay the start of a rate cut, especially amid heightened tensions between Israel and Iran. A June 12 report by Allianz Research says that the Fed is unlikely to start an easing cycle amid peak inflation. Allianz believes that US inflation will peak in the fourth quarter of 2025 rather than the third quarter of 2025, as previously expected. At the same time, the rate will remain unchanged until December.

At the May meeting, Fed leaders agreed that heightened economic uncertainty and increased risks of higher unemployment and inflation justify maintaining a wait-and-see stance on monetary policy. In the minutes of the sounded the Fed's concerns about a stagflation scenario.

Recent events in the Middle East, in particular, mutual airstrikes between Israel and Iran, caused a sharp jump in oil prices. On June 13, prices rose 7%, posting their highest one-day gain in three years. On June 16, oil continued to rise in price. Of particular concern is the threat of disruption to shipping through the Strait of Hormuz. About one-fifth of the world's oil consumption passes through it. A blockade of this strait by Iran could lead to a significant increase in prices.