AI Summary
5 min readOn Tuesday, April 14th, Morgan Stanley’s global team of regional chief economists gathered for their quarterly roundtable, and the dominant theme was clear: the escalation in the Middle East has created an energy shock that is hitting different economies in fundamentally different ways. The conversation centered on how central banks in the US, Europe, and Asia are calibrating their responses to a dual threat—higher inflation from energy prices and slower growth from disrupted supply—and why the answer varies so sharply by region.
The Fed: On Hold, with a Bias to Cut
Seth Carpenter and US Chief Economist Mike Gapen agreed that the Federal Reserve’s likely path is either to hold rates steady or to cut them later this year. The key mechanism is that historical data shows oil price shocks in the US have very limited second-round effects on core inflation. Higher headline inflation from energy tends to be transitory, and if oil prices stay elevated long enough, they actually create demand destruction that weakens the economy. Gapen argued that the Fed is correctly assessing that tariff pass-through to goods prices will moderate and that the oil price effect on headline inflation will fade, allowing core inflation to ease. This should open the door for two rate cuts later this year. The wrong move, he stressed, would be to raise rates into this environment. The current market p
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What you'll learn
- 1 (00:00) **Introduction & Episode Setup** - Host Seth Carpenter introduces the quarterly economic roundtable and the panel of regional chief economists.
- 2 (00:49) **The Dominant Market Story: Iran Conflict & Energy Shock** - Seth frames the macro context: the escalation/de-escalation of the Iran conflict and its ripple effects across energy, inflation, and growth.
- 3 (01:20) **Fed Outlook: On Hold or Cutting, Not Hiking** - Michael Gapen explains the Fed's likely reaction function to the oil shock in the US.
- 4 (03:36) **ECB Outlook: Hiking to Signal Against Inflation** - Jens Eisenschmidt explains the ECB's different mandate and its likely path of rate hikes.
- 5 (06:38) **Asia's Unique Exposure: Price Shock vs. Supply Shortages** - Chait Naya explains why Asia is the most exposed region, focusing on both oil price increases and physical supply shortages.
- 6 (09:03) **Ranking Asia's Most Exposed Economies** - Chait Naya ranks specific Asian economies by vulnerability to both price and supply shocks.
- 7 (10:02) **China's Unique Position: Low Exposure & Deflation Context** - Chait Naya analyzes China's relatively low growth damage and its ongoing deflationary challenge.
+ Full timestamped outline available in the app
Show Notes
In this first of a two-part discussion, our Global Chief Economist Seth Carpenter leads a discussion with chief regional economists Michael Gapen, Jens Eisenschmidt and Chetan Ahya on impacts of the conflict in Iran and how central banks are responding.
Read more insights from Morgan Stanley.
----- Transcript -----
Seth Carpenter: Welcome to Thoughts in the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And today we're going to kick off our quarterly economic roundtable. And this is where we try to step back a little bit from the headlines and the day-to-day changes in markets and try to put the global picture together and frame it for you.
In the first of this two-part discussion, we're going to cover the implications of the oil price shock for energy, inflation, and for central bank policy.
As always, I'm joined by the Chief Regional Economists here at Morgan Stanley. I've got Michael Gapen, our Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe Economist.
It's Tuesday, April 14th at 10am in New York.
Jens Eisenschmidt: And 3pm in London.
Chetan Ahya: And 10pm in Hong Kong.
Seth Carpenter: So, let's just jump right into this. Over the past several weeks, global markets have been dominated by one story. The escalation, de-escalation, the news flow back and forth about the conflict in Iran and the ripple across energy markets, inflation, and growth. Our view has been that even if we don't see another huge leg up in the price of energy and another surge in volatility across financial markets, the persistence of the shock in terms of disrupted supply will be at least as important, if not more so for markets.
So, let me start here in the U.S., Mike. You and I have each had lots of conversations with clients about how the Fed's going to react. Market pricing moved a lot before, has retraced, and now is kind of looking at no change in policy for this year, give or take. Your baseline remains that the Fed will have an easing bias and that we'll end up with a couple of cuts later this year. Can you walk us through that thinking, and also where the debate is with clients?
Michael Gapen: Sure. So, the evidence in the data… This goes back, let's call it several decades now – that oil price shocks in the U.S. do tend to push headline inflation higher by definition. But they have very limited second round effects on core inflation. And the higher oil prices go, the more likely it is that you get some demand destruction, some weakness in spending, maybe even some weakness in hiring. So, there is a bit of a non-linearity here.
In our baseline where oil
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