Trump brought prices down for a year, then managed to spike it up by 100% in 2 months. The Fed prepares to invent a new “transitory.”

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Amid all this turbulence in Hormuz, the Fed kept its dot plot intact, which only underscores the point I have made all week, that Powell is not keen on rocking the boat before he steps down. There is a clear preference for stability here, even in the face of what is shaping up to be a meaningful external shock.
They have kept an explicit cutting bias and maintained the one cut penciled in for next year in the dot plot, despite a notable increase in CPI and PCE forecasts for 2026. That is inherently dovish, and stands in fairly sharp contrast to the ECB, the RBA, and others, who appear more inclined to respond directly to the oil driven inflation impulse.
In that sense, the Fed is effectively looking through the current shock, or at least attempting to. If the dust settles even slightly on this crisis, rate cuts are still very much in play, no matter how bizarre that may sound given the scale of the input cost pressures already working their way through the system. The reaction function seems to be anchored in growth concerns rather than inflation at this stage.
Clarida, a former FOMC member, even suggested on television that the Fed may have to come up with a new version of the word “transitory” to justify continued easing in this environment. That probably says more than any formal statement could. The willingness to reframe inflation dynamics in order to preserve policy flexibility is quite evident.
Taken together, this leaves me somewhat hopeful, or at least more comfortable, that the business cycle can absorb this shock as well. Liquidity conditions are not tightening aggressively, and policy makers do not appear eager to amplify the downside risks.
That said, the same cannot necessarily be said for bonds. If inflation expectations remain elevated while the Fed leans toward easing, the long end of the curve could come under sustained pressure. In that scenario, it is not difficult to imagine a continued steepening dynamic, where growth holds up just enough, but term premia reprice meaningfully higher.