On April 1, 2026 (Wednesday, local time in the United States), St. Louis Federal Reserve President Musalem delivered a speech at the American Enterprise Institute (AEI) in Washington, putting the Iran war and the resulting energy shock at the center of Federal Reserve decision-making. In his capacity as a central bank official, he made a rare strong judgment on the relationship between oil prices and inflation: energy price increases are expected to be almost directly transmitted to overall inflation, which means that under the current geopolitical tensions, the United States is in a period of heightened sensitivity to inflation. Alongside this warning, major U.S. stock indexes collectively rose during the opening phase that day, with the Dow Jones rising about 0.57%, the S&P 500 rising 0.66%, and the Nasdaq rising 0.7%. Cryptocurrency-related stocks also began to rise, on the surface representing an “optimistic bidding” for risk, while beneath the surface, hidden anxieties about policy shifts and the risk of economic recession were rapidly accumulating.

Oil Prices as Inflation Accelerators: Why They Are Nearly One-to-One Transmissions

In his AEI speech, Musalem’s most striking point was his judgment on the strength of energy price transmission to overall inflation—expected to be nearly one-to-one. This is not merely a matter of gas station prices but rather the “underlying computational power” of energy in the modern economy: whether in manufacturing segments through electricity and fuel consumption, or in logistics costs for agricultural products and durable goods transported across states or even internationally, oil prices act like an invisible tax, layering on top of corporate costs and end prices. Once the prices of crude oil and refined oil continue to rise, the impact will not be confined to the CPI “energy item” but will permeate into more categories through production, storage, and transportation processes.

Historically, every major energy shock—from the two oil crises of the last century to more recent disturbances in the Middle East—has manifested in broader price levels within a short lag. However, the oil price shock in the context of the current Iran war may be more aggressive in both speed and scope: on one hand, the highly financialized crude oil and refined oil contracts in financial markets allow geopolitical risks to be amplified and priced in a shorter timeframe; on the other hand, the global supply chain has not fully restored redundancy post-pandemic, meaning that any tension at critical points will more directly translate to end-prices.

In traditional statistics and policy discussions, “excluding energy and food” is often employed to observe core inflation, so as to avoid short-term fluctuations disturbing trend judgments. However, this time, what Musalem emphasized was precisely the path through which energy permeates the cost chain into “core items”: when companies face higher transportation and electricity costs, they may at some point choose to pass these onto categories categorized as core inflation, such as clothing, home appliances, and service fees; an increase in residents’ expectations for future energy expenditures will also change wage negotiations and consumption decisions, further raising the price stickiness in the service sector.

It is important to emphasize that the current proportion of “almost one-to-one” transmission comes more from the publicly released summary of Musalem’s speech and interpretations from some research institutions, rather than from a systematic quantitative report that has already been provided. In the absence of more detailed models and data disclosures, this judgment resembles a warning of the upper limit of risks from a central bank official, rather than a rule that has been strictly validated by history. Subsequent official inflation data and various expectation surveys will become key references for testing the strength of this hypothesis.

Chokepoint in the Strait of Hormuz: Geopolitical Games on Energy Corridors

Parallel to the discussion of inflation transmission is the real concern about the safety of energy corridors. Recently, the Iranian Islamic Revolutionary Guard Corps publicly declared that the situation in the Strait of Hormuz is “firmly under their control,” which itself is a declaration of pricing power: this narrow passage connecting the Persian Gulf and the open sea, that carries a significant amount of global crude and refined oil shipments, can be used as a bargaining chip when military and political needs arise. For economies that rely on maritime energy transportation, any uncertainty about whether the strait is “open” will quickly translate to risk premiums in futures markets.

In terms of share, the Strait of Hormuz has long been one of the most critical channels for global crude oil and liquefied natural gas exports; a significant proportion of seaborne crude oil from major oil-producing countries in the Middle East must pass through this narrow waterway. Should any blockades, harassment, or even just military exercises escalate here, insurance costs, route adjustments, and detour costs will quickly rise, causing oil prices not only to reflect spot supply and demand but also to incorporate higher geopolitical uncertainty premiums. For financial markets, even if physical flows have not yet been significantly disrupted, as long as the Revolutionary Guard holds the “valve,” prices will preemptively hedge against the worst-case scenario.

On the Iran issue, the information warfare and power misalignment between the Trump administration and the Tehran regime are conspicuously evident. On one side are the strong rhetoric and threats of sanctions from the presidential level in the United States, while on the other, the Revolutionary Guard, which holds military power within the Iranian system, shapes the situation through concrete actions and statements. The natural time lag and information noise between presidential tweets, diplomatic language, and naval deployments in the strait complicate the market's judgment on true intentions, making the “risk premiums” in oil prices and related assets more tenacious and harder to dissipate.

It is precisely under such interwoven geopolitical and energy risks that the pricing of U.S. assets gradually embeds a “persisting risk premium”—investors are no longer only looking at growth and cash flow discounts in fundamental models, but must also add constant add-ons for regional conflicts and blocked shipping routes into discount rates. For the Federal Reserve, this means that inflation judgments are more likely to tilt toward the hawkish side: as long as war and shipping route risks remain unclear, the upward pressure from energy on inflation will be seen as more enduring rather than temporary shocks.

Raise Rates or Cut Rates? The Federal Reserve Wavers Under Stagflation Shadows

In his speech at AEI, Musalem provided a typical “dual threshold” framework for future policy paths: if inflation itself or inflation expectations rise significantly, the Federal Reserve will be more inclined to raise interest rates to re-anchor price stability; conversely, if the labor market shows “significant weakening,” it will consider cutting rates to prevent the economy from falling into recession too soon. This statement clearly outlines the dilemma faced by current decision-makers—when inflation and employment targets may send conflicting signals, each adjustment of interest rate tools represents a re-drawing between the two goals.

From the latest data, the U.S. March S&P Global Manufacturing PMI final value was 52.3, slightly below the previous value of 52.4, but still above the 50 growth-activity threshold. This set of data does not send an extreme signal: manufacturing expansion momentum has slightly slowed compared to previous periods but has not approached the level of a “plummeting contraction.” The economy can still maintain moderate expansion but has begun to reveal fatigue under the pressure of high interest rates and high uncertainty. In parallel, the labor market and the services sector have yet to show signs of deep deterioration, making it difficult for the Federal Reserve to turn toward easing purely based on the intuition of “slowing growth.”

In the context where the rise in energy-driven prices coincides with declining growth expectations, the concept of “stagflation,” once considered a historical case by academia, is once again nearing the reality of the decision-making table. If the choice is to raise interest rates, inflation expectations may be suppressed temporarily under nominal rate increases and strengthened policy signals, but higher financing costs may also accelerate corporate investment contraction and employment cooling, pushing a moderate slowdown into a deeper recession; if interest rates are cut to cushion growth and employment pressures, it may be interpreted by the market as an increase in tolerance for prices, further elevating upward expectations for sticky prices such as oil and rent, and undermining the credibility of long-term inflation targets.

In such a situation dominated by supply-side energy shocks, the limitations of the Federal Reserve's traditional toolbox are particularly evident. Whether it’s the policy interest rate or the holdings of government bonds and MBS on its large balance sheet, they are essentially more suited for demand-side management—by altering financing costs and wealth effects, either stimulating or suppressing overall demand. However, for supply disturbances rooted in the Strait of Hormuz, war, and sanctions, even the most precise adjustments in rates find it difficult to directly enhance crude oil output or resolve bottlenecks in shipping routes. Thus, the importance of policy communication and expectation management is forced to rise: stabilizing market confidence in future prices and policy paths through clear forward guidance and reaffirming inflation targets becomes equally, if not more, important than the question of “how many rate hikes versus how much rate cuts.”

Stock and Cryptocurrency Concepts Rise Together: Is This Optimism or Anesthesia?

Interestingly, while Musalem released a more hawkish inflation warning, market price behavior provided a distinctly different short-term response. As of the opening phase that day, the Dow Jones rose about 0.57%, the S&P 500 increased by 0.66%, and the Nasdaq climbed 0.7%, indicating a collective endorsement of risk assets. On the surface, this is a reassuring buy due to the economy not yet stalling, and corporate profits remaining considerable; however, contrasted with his judgments on energy shocks and inflation sensitivity, this upward trend resembles a temporary neglect of macro complexity.

Cryptocurrency-related stocks also saw slight increases—MicroStrategy rose by about 0.37%, and Coinbase increased by about 1.02%, aligning with overall market direction. The increase, although not exaggerated, reveals a fact: at least within this trading day, the market viewed the Iran conflict and risks in the Strait of Hormuz as “manageable noise,” rather than a systemic variable that has shifted macro pivots. For assets highly dependent on liquidity and risk appetite, this represents a typical short-term “risk appetite recovery,” rather than a rational pricing for the medium- to long-term macro trajectory.

In contrast to this surface optimism is the mid-term risk reassessment being pushed forward at the institutional level. JPMorgan has lowered its target for the S&P 500 to 7200 points, driven by systemic concerns over slowing future profit growth and rising probabilities of economic recession. This action indicates that although the index can still climb under money drives on that day, the valuation anchor based on fundamentals and macro assumptions is quietly shifting downwards—the market's expectations for “final report cards” are worsening, though short-term sentiment has not yet fully synchronized.

Thus, a fragmented market structure is gradually surfacing: on one hand, short-term risk appetite is rising, with stock indices and cryptocurrency concepts continuing to climb on the inertia of liquidity and emotion; on the other hand, long-term targets are being adjusted down, with the risk of energy shocks becoming persistent and the Federal Reserve turning hawkish again, accumulating in the shadows. Such misalignment makes the current rise more prone to evolving into a “prepayment” of future volatility; should inflation data, oil price trends, or policy statements confirm adverse directions, the slope of the pullback could be amplified.

As the Flames of War Continue, a Test of Endurance Between Policy and Market

In summary, the Iran war and risks in the Strait of Hormuz are clearly transmitting layer by layer to U.S. inflation and the Federal Reserve’s decision table: the Revolutionary Guard’s emphasis on control of energy corridors is elevating the geopolitical premium of crude and refined oil; rising oil prices are permeating into broader commodity and service prices along the production and transportation cost chains, raising overall inflation and inflation expectations; and in response to this continuous and uncertain supply shock, the Federal Reserve must recalibrate its hawkish-dovish balance in each monetary policy meeting and speech.

Between “raising rates to curb inflation” and “cutting rates to stabilize growth,” the Federal Reserve is being forced to repeatedly weigh its options under the shadow of stagflation: higher rates may suppress some prices but also compress investment and employment; lower rates can alleviate growth pressure but may ignite inflation expectations already disturbed by war and shipping risks. Musalem’s remarks, in fact, delineate the boundaries for this difficult balance in advance—any significant rise in inflation and inflation expectations will prioritize triggering hawkish reactions, while a significant weakening in the labor market may open space for dovish measures. Every slight adjustment in wording will be magnified by the market into signals for revaluation of stocks, bonds, and even cryptocurrencies.

Looking ahead to the next few months, several key indicators will collectively form the Federal Reserve's “decision dashboard”: the path of energy prices is the most intuitive upstream variable; inflation expectations from market and consumer surveys provide comprehensive feedback on policy credibility and the duration of the war; changes in the unemployment rate, non-farm payrolls, and wage growth in the labor market will reveal whether the economy is slipping from slowdown into recession; and business sentiment indicators, including the S&P Global Manufacturing PMI, will continuously recalibrate the market’s intuition about the health of the real economy. The combined trajectory of these data will significantly determine whether the Federal Reserve holds to high rates or passively turns towards easing.

For participants in cryptocurrency assets and related stocks, this current wave of increase synchronizing with U.S. stocks feels more like a “reflected market” in the backdrop of war—capital chooses to favor liquidity and emotion before seeing hard landing evidence, rather than pricing in geopolitical risks and energy shocks. The real test lies ahead: when oil price trends, inflation data, and the Federal Reserve's path gradually become clear, the market will begin to provide more directional choices. At that point, the volatility of risk assets may not be as mild as today, leaving investors with a narrower timeframe to adjust their positions and perceptions than imagined.

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