Fed Official: Strait of Hormuz Closure Would Raise Inflation

The official noted that a large enough price shock could threaten inflation expectations, potentially necessitating a series of rate increases to defend the Fed's 2% inflation target. Crop shipments to Iran through the strait have fallen more than 40% since March, exacerbating the country's high food inflation amid a U.S. blockade.

Brent futures prices are on an upward trend due to tightening oil supplies from the strait's closure. The July contract has become the front-month, replacing June, and is already trading higher than predecessors at similar stages. In a strongly backwardated market, futures prices tend to rise toward expiry.

Front-month prices are likely to set a new wartime high by the end of May unless the strait reopens. The official indicated that even a benign scenario with a soon reopening would keep inflation high enough to hold rates steady for an extended period.

Prior to the war, the official had anticipated inflation declining enough to warrant another rate cut this year. However, the situation had not changed sufficiently in March to alter the Fed's policy statement. The official objected to the Fed policy statement due to heightened inflation risks from the Iran war.

A price shock from the prolonged closure could require a strong policy response to keep inflation expectations anchored.

The strait's closure is contributing to global supply disruptions. Oil market dynamics suggest continued price increases in the near term. Food supply issues in Iran highlight the blockade's impact on essential goods. These developments underscore the interconnected risks to inflation and monetary policy.