Episode summary
Economic Roundtable: Energy Shock & Central Banks’ Action
Thoughts on the Market (Morgan Stanley)
· · 13 min · Hosts: Seth Carpenter, Michael Gapen · Guests: Jens Eisenschmidt, Chetan Ahya
Summary
The discussion centered on how the Iran-related energy shock is affecting inflation, growth, and central bank reaction across the US, Europe, and Asia. Seth Carpenter framed the key issue as not just another jump in oil prices, but the persistence of supply disruption and its ripple effects through markets and policy.
Michael Gapen argued that in the US, higher oil prices should lift headline inflation but have limited second-round effects on core inflation. He said the Fed is likely to stay on hold for now, then cut twice later this year if inflation moderates as expected. He also said raising rates into an energy shock would be the wrong response.
Jens Eisenschmidt said the ECB faces a different tradeoff because of its single inflation mandate and stronger history of second-round effects. He expects the ECB to respond more forcefully to inflation pressures, forecasting rate hikes in June and September, though weaker growth could temper that path. Chetan Ahya said Asia is the most exposed region because of its heavy oil imports and possible physical supply shortages, with India, Taiwan, Thailand, Korea, and the Philippines most vulnerable. He said China is relatively insulated on growth, but higher input costs will not solve its deflation problem.
Key takeaways
- Michael Gapen expects the Fed to keep an easing bias and cut twice this year if oil-driven inflation pressures fade.
- Jens Eisenschmidt forecast ECB rate hikes in June and September, but said a sharper growth downgrade could delay or limit them.
- Chetan Ahya said Asia is the most exposed region to the shock, with net oil imports around 2% of GDP and added risk from supply shortages.
- Ahya cut Asia growth from 4.8% to 4.4% and said a move to $150 oil could pull 2026 growth down to 3.9%.
- Ahya said China’s growth should fall only about 10 basis points, but higher input prices will not end its deflation challenge.
Notable quotes
“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”
“oil price shocks in the US do tend to push headline inflation higher by definition but they have very limited second round effects on core inflation”
“our view is that the Fed is right in its assessment that tariff pass through to goods prices will eventually moderate and that the oil price effect on headline will diminish”
“the ECB really has a single inflation mandate and not a dual mandate like the Fed in the case of the US”
“Asia is the most exposed region. The best metric for assessing that is how much is the net oil imports of each of the regions in the world”
How the episode opens
Welcome to thoughts on 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 roundt.
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 economist here at Morgan Stanley.
I've got Michael Gapen, our chief US economist, Chetanaya, our chief Asia economist, and Yen's Eisen Schmidt, our chief Europe economist. It's Tuesday, April 14th at 10 a.m. in New York and 3 p.m.
in London
And 10 p.m. in Hong Kong.
So, let's just jump right into this. Over the past several weeks, global markets have been dominated by one story. The escalation, deescalation, 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 US. 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.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- energy shock
- iran conflict
- central bank policy
- rates outlook
- economic impact
Watch the episode
Watch “Economic Roundtable: Energy Shock & Central Banks’ Action” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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