KEY EVENTS
The geopolitical context in March was dominated by the war in the Middle East, with the US and Israel launching attacks and Iran reacting.
The feeling is that two of the three actors are moving with a very clear purpose, while the world’s main superpower appears to be confronted with unforeseen problems that are difficult to solve.
The focus of our publication remains primarily on macroeconomic aspects, and their analysis is quite straightforward: Tehran has managed (with a script that appeared anything but improvised) to completely draw an entire region into the conflict — a region that has a decisive weight for the entire globe in terms of energy supply (see oil and gas extraction).
What is most concerning is the de-facto closure of the Strait of Hormuz. It is also impossible to overlook how damage to energy infrastructure risks having serious implications, with a timeline that is not easy to estimate.
Nor should the economic and financial aspects arising from the presence in the area of financial centers (Dubai first and foremost), considered by many to be safe from geopolitical risks, be ignored.
The military operations were decided — as has been declared and repeatedly reiterated — to improve the stability of a delicate area. In reality, they have created heavy insecurity on a global scale.
In this context, the decision by a federal judge to reject the Department of Justice’s request to summon Fed Chairman J. Powell before a Grand Jury on charges of mismanagement of public funds in the context of the central bank’s headquarters renovation has been pushed into the background. On the political-institutional level, this represents an unfavorable development for the Trump administration.
“The implications of developments in the Middle East for the U.S. Economy are uncertain. The Committee is attentive to the risks to both sides of its dual mandate.” March 18: The Fed makes no secret of the delicacy of the moment.
The analysis of the macroeconomic picture has focused entirely on trying to understand what the implications of the rise in energy costs caused by the war in the Middle East might be.
This is occurring on top of an already rather delicate scenario, characterized by weak growth and inflation at the limits of what is acceptable. In recent weeks, the major central banks have held their periodic meetings, all of them emphasizing that visibility on the economic outlook has deteriorated significantly.
As a result, there is a need to constantly monitor the evolution of the energy situation, to the point that — at least for the moment — they are not providing particularly reliable indications regarding the future direction of monetary policy.
Financial markets have reacted promptly by repositioning their expectations: in the case of the Fed, the hypothesis of two rate cuts during the year has been completely eliminated, while even the view of a still relatively expansionary ECB now appears outdated.
In fact, the idea of three rate hikes over the next three quarters is beginning to gain ground in Europe.
It is clear that a shock caused by rising oil prices represents a far more damaging development than one generated by overheating growth. In the United States, moreover, the Trump administration continues to exert pressure on the Fed’s independence.
PROSPECTS
At the moment, the only certainty is that there are no certainties — a play on words that is perfectly in line with the mantra expressed by central banks in recent weeks: it all depends on the data (“we are data dependent”).
From a geopolitical point of view, the ongoing confrontation increasingly appears difficult to keep within controlled boundaries. It is also inevitable to wonder what the implications of this conflict might be for global balances. China, which has so far remained on the sidelines, could take on a more active role, especially in light of the upcoming Spring meeting between Presidents Trump and Xi Jinping.
At the same time, Washington’s positions toward Europe do not appear to be guided by a constructive spirit, in a context that remains further complicated by the ongoing war in the eastern part of the continent and by doubts about the role of NATO — an organization with not only military objectives.
On the cyclical and central banking front, the picture has deteriorated rapidly following a conflict that is both very recent and already deeply impactful, and above all lacking any visibility regarding its future evolution.
It is particularly the price of oil that is causing concern, both for the levels it has reached and for the risk that it may remain well above the threshold of sustainability for the global economy for a long time.
The Fed will remain at the center of attention also for aspects related to its own governance: it is up to the President to nominate the Chairman (K. Warsh), but the transition requires Senate approval, which as of today has not yet occurred and is made even more uncertain by the judge’s decision mentioned earlier.
It will also be important to understand whether J. Powell will exit the scene completely at the end of his term as “Chairman of the Board,” as has usually happened in the past, or whether he will remain on the Board until the natural expiration (January 31, 2028) of his term as Governor / “Member of the Board.”