by Paul Hoffmeister, Portfolio Manager and Chief Economist
The macroeconomic outlook has become more complicated following the recent disruption to oil flows through the Strait of Hormuz. The resulting energy supply shock has pushed oil and gasoline prices higher, increased inflation expectations, and caused investors to reassess the likely path of Federal Reserve policy. Notwithstanding, the U.S. labor market appears resilient. Together, these developments have created an increasingly difficult policy environment for the Federal Open Market Committee.
The sharp decline in tanker traffic through the Strait of Hormuz represents a meaningful disruption to global petroleum supplies. According to Bloomberg, the average number of tanker vessels crossing through the Strait during 2025 was just over 60 per day; however, during the last month, that number has been consistently less than 10 per day. West Texas crude, which has risen from less than $60 per barrel at the start of the year to nearly $90 last week, is incorporating both the immediate loss of supply and the risk that the current disruption might persist.
Higher oil prices have translated into higher gasoline prices in the United States. At the beginning of the year, the average price of a gallon of unleaded gasoline, according to AAA, was less than $2.85; now it’s nearly $4.15. This matters economically in two ways. First, higher gasoline and energy costs directly raise headline inflation and can eventually work their way into transportation, production, and other prices. Second, higher energy costs effectively function as a tax on consumers. Households must devote more income to gasoline and utilities, leaving less available for discretionary consumption. The recent oil shock can therefore simultaneously increase inflation and weaken economic growth.
This combination is particularly problematic for the Federal Reserve. Market-based inflation expectations have moved higher as investors incorporate the energy shock into their outlook. According to the Federal Reserve Bank of New York, the median expectation among consumers is for annual inflation to rise approximately 3.6% during the next three years.
A temporary increase in oil prices alone doesn’t necessarily require a monetary-policy response. But there is concern that persistently higher energy prices will influence broader inflation expectations and ultimately make inflation more difficult to return sustainably to the Fed’s 2% target.
Consequently, markets have repriced the expected path of monetary policy. Investors increasingly expect the federal funds rate to remain higher than previously anticipated, reflecting diminished expectations for monetary easing. Early this year, federal funds futures were expecting the year-end 2027 fed funds rate to trade between 3.0% and 3.25%; now the expectation is that it will be nearly 100 basis points more than that.
Long-term Treasury yields have also moved higher, further tightening financial conditions through higher mortgage rates, corporate borrowing costs, and discount rates applied to financial assets.
For the Federal Open Market Committee, the result is an unusually difficult policy tradeoff. Higher inflation and rising inflation expectations argue for maintaining restrictive monetary policy. Yet higher energy prices and higher interest rates themselves represent headwinds to future economic growth. The Fed therefore risks aggravating an economic slowdown if it keeps rates too high, while easing too aggressively could allow renewed inflation pressures to become more deeply embedded.
Last week’s stronger-than-expected August employment report further complicates that decision. This follows, in our view, weeks of lackluster employment data. The recent, stronger nonfarm payroll growth suggests that the labor market remains resilient and that the economy is not currently weak enough to force the Fed into aggressive easing. That may give policymakers greater latitude to remain focused on inflation.
At the moment, the fed funds futures suggest over a 60% probability of a rate increase from the September 15-16 FOMC meeting. The macroeconomic chain of 2026 appears to be that the Hormuz disruption has pushed energy prices higher, increased inflation risks, raised the expected path of Fed policy, and driven Treasury yields higher. Those developments are tightening financial conditions while the energy shock itself threatens future growth. The Fed consequently finds itself in an uncomfortable position: rising energy prices and inflation expectations are making the case for interest rate hikes, but recently tightening financial conditions threaten to weaken growth by itself.
Paul Hoffmeister is Chief Economist and Portfolio Manager at Camelot Portfolios, managing partner of Camelot Event-Driven Advisors (CEDA), and co-portfolio manager of the Camelot Event-Driven Fund (EVDIX • EVDAX).
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All investing carries with it risk, including the risk of loss, that investors should be prepared to bear. This material is for educational use only and is not intended to be construed as investment advice. Readers or participants in an oral presentation of these materials should consult with their own personal financial, tax, legal and other advisors before making any decision to make any investment, including any investment believed to be related to the topics of these materials. The discussion herein, while based on current economic data, may or may not lead to the outcomes presented, express or implied. Economic conditions, even in a single sector, are subject to an unknown number of variables, the totality of which are impossible to predict or account for in analytical assumptions. Past performance does not necessarily lead to future results. Specifically, trends in economic data do not always, and frequently do not, continue as expected. B767
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Copyright © 2026 Camelot Portfolios LLC, All rights reserved.