By Randall W. Forsyth
"Foreseeable future" is an oxymoron right up there with "jumbo shrimp." That's a realization the world's major central banks are coming to.
The fog of war has taken away the visibility for the global economy at large and for individual countries. The U.S. economy may justify President Donald Trump's characterization as the "hottest" in the world, and could get hotter still. That is, if the choke point at the Strait of Hormuz doesn't strangle the global economy.
At the same time, central bankers across the globe have become increasingly independent, with more of them willing to dissent from group policy decisions. That's apart from the imminent changing of the guard at the Federal Reserve. Kevin Warsh will be grappling with greater uncertainty and less uniformity at the Fed when he probably takes over from Jerome Powell as head of the U.S. central bank on May 15.
Nowhere was this more evident than in the meeting of the Federal Open Market Committee this past week. As universally expected, the panel held its key policy interest rate unchanged, in a range of 3.50% to 3.75%. But four of the 12 FOMC voters dissented. While agreeing with the decision to stand pat on rates, three Fed district presidents objected to the policy statement's inclusion of a bias toward future rate easing, which implicitly presumes an easing in future inflation. Fed governor Stephen Miran once again preferred a rate cut, as he has in the past.
Warsh, who has long decried "groupthink" at the Fed, may regret what he has wished for. He has also criticized "forward guidance" in which the central bank tries to influence market expectations. On that score, Lori Logan, president of the Dallas Fed, explained her dissent on Friday by noting that, given the uncertainty about inflation and the labor market, the Fed's next rate move could be either an increase or a cut.
Even U.S. Treasury Secretary Scott Bessent said last month that the Fed should "wait and see" while it watches how the situation in the Middle East plays out. He added that rates eventually should be lowered, as his boss has vociferously insisted.
Powell said he would remain as a Fed governor (and therefore an FOMC voter) after his chairmanship ends, although he said at his news conference on Wednesday that he would keep a low profile. But that also will mean no new vacancy on the Fed Board; Warsh will take Miran's seat; Miran's term officially ended in January.
Central banks abroad similarly are grappling with the uncertain outlook. The European Central Bank also held policy steady at its meeting this past week, saying the upside risks to inflation and downside risk to growth both have intensified since its previous meeting. Similarly, the Bank of England, while keeping its policy unchanged this past week, outlined three separate scenarios for inflation and the United Kingdom economy, a reflection of the lack of visibility.
If anything, the argument for a U.S. rate increase is stronger than for cuts, said Komal Sri-Kumar, the eponym of Sri-Kumar Global Strategies. Such a small but hugely symbolic move would send a signal that the Fed is willing to impose discipline to curb inflation that was persistently above the Fed's 2% target before the surge in oil prices, he said.
Central bankers have traditionally sought to look through oil-price shocks. More important are the so-called second-order effects as higher petroleum costs filter through the economy, affecting other goods, such as fertilizers, and services, notably transportation prices such as airfares. The impact on both will depend on how long and how high the oil prices rise.
But, for now, the U.S. economy continues to roll along. New numbers on first-quarter gross domestic product reported this past week showed that growth, after inflation, bounced back to a 2.0% annual rate from the fourth quarter's 0.5%. That exaggerates the quarter-to-quarter changes, however. Real final sales to domestic private purchasers (which strips away the effects of inventories, trade swings, and government spending) rebounded in the latest quarter to a sturdy 2.5% from 1.8%. Meanwhile, new April data released on Friday by the Institute for Supply Management showed manufacturing expanding for the fourth straight month, accompanied by a further increase in price pressures.
Piper Sandler's economics team led by Nancy Lazar looks for GDP growth to pick up to a 3% pace. That is supported by past Fed rate cuts, totaling 1.75 percentage points; fiscal policy, with individual tax cuts, full depreciation of capital expenditure, and deregulation; and strong productivity growth. Finally, oil prices are less of a headwind, reflecting U.S. energy independence.
Hardly an economy that sounds as if it needs rate relief. But at the same time, a prolonged shutdown of the Strait of Hormuz may scuttle an optimistic outlook, which central banks may be powerless to offset.
"Monetary policy cannot restore oil supply, make crops grow without fertilizer, make chips without helium, or make cars without chips," wrote Carl B. Weinberg, head of High Frequency Economics. "The response to Hormuz's closure has to be about more than interest-rate settings and monetary conditions. Unless broad-reaching measures are taken, global prosperity is at risk."
Rarely have the possible outcomes for the economy been so dramatically divergent as those laid out by Lazar and Weinberg. The stock market clearly sides with her, closing out its best month in six years in April, with the S&P 500 index and the Nasdaq Composite ending at records again on Thursday. The capital markets also are booming, exemplified by Meta Platforms bringing a $25 billion, six-tranche bond offering to market this past week.
So far, the disruption from oil prices climbing past $120 a barrel at one point this past week has been surprisingly limited. Whether that can continue is another question. As with almost every new Fed chair in the past half-century, Warsh may be tested by this uncertain outlook.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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May 01, 2026 17:55 ET (21:55 GMT)
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