This is a historic week in the world of monetary policymaking. The "G4" central banks meet in the same week for the first time since December 2021, and only the second time ever, with investors clamoring for evidence of whether the Middle East oil shock could make policymakers start thinking about rate hikes.
None of these central banks – the Federal Reserve, European Central Bank, Bank of England and Bank of Japan – are expected to raise interest rates this week. But if the tone from the accompanying official statements and press conferences reflects the hawkish moves in rate futures markets, the question may soon become when, not if, the tightening will begin.
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In the two weeks since the first U.S.-Israeli attacks on Iran on February 28, oil prices have soared through $100 a barrel, triggering a spike in inflation fears that have reshaped the expected 2026 policy paths for the G4 central banks.
While rate-setters are supposed to "look through" temporary spikes in energy prices, they are still smarting from their questionable call that the global inflation spike of 2021-22 would be "transitory." They'll be wary of making the same mistake again.
At the same time, the current energy crisis could also result in heavy hits to household spending, consumer and business confidence, and hiring. If growth slows sharply, the temptation to cut rates will be strong.
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Ultimately, amid all the noise and uncertainty, rate-setters may feel it is better to sit tight and await more clarity. Pausing, they can reasonably argue, should not be interpreted as paralysis in this environment.
So let's consider how these central banks' expected rate paths have changed since the Middle East conflict erupted, the pressure points each faces, and what steer we can expect from them this week.
FEDERAL RESERVE
U.S. policymakers may have a bit more breathing room on the inflation front because the United States is a net energy exporter. On top of that, the dollar is appreciating and will likely benefit from war-time demand for liquidity. That should help cap U.S. inflationary pressures.
Focus will turn to the Fed's updated Summary of Economic Projections, and whether the current median estimate of one rate cut this year and another next year is maintained. The revised "dot plot" of officials' projected rate paths will shine further light on the range of views on the Federal Open Market Committee.
