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NewsMaterial4 min readDisconfirmAI Editorial

James Picerno: Energy Shocks Are No Longer Transitory; The Fed's 'Wait-and-See' Logic Is Eroding

The Capital Spectator author James Picerno points out that the core dilemma for Federal Reserve Chair Kevin Warsh is not whether to raise rates, but how to explain the consistency of holding steady with his 2% inflation target commitment amid rising inflation. Using a neutral interest rate model constructed from unemployment and CPI data, he demonstrates that the current 3.75%–4.0% range does not deviate significantly from fundamentals, but the policy rationale of 'looking through' transitory energy shocks is eroding due to an eight-month conflict and accelerating GDP.

2026-10-27 19:28 GMT+8

Federal Reserve Chair Kevin Warsh stated at the Jackson Hole symposium: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do." However, market pricing indicates that the upcoming policy decision will likely involve holding rates steady. The Capital Spectator author James Picerno argues that Warsh’s true challenge is not whether to raise rates, but how to justify to the market that choosing inaction remains consistent with that commitment, even as inflation resurges and energy shocks persist without an apparent end after eight months.

Picerno first employs a simple analytical tool: estimating the federal funds neutral rate using unemployment and consumer price indices. The conclusion is that the current 3.75%–4.0% target range aligns broadly with existing conditions. In other words, from the model's perspective, the interest rate level is not 'too loose.' However, he then poses the critical question: If inflationary pressures are continuing to build, should the central bank act more proactively rather than waiting for deviations to occur before catching up?

This echoes the lessons of 2021–2022. During that period, U.S. consumer inflation rose from approximately 3% early in the year to a peak of 9% in June 2022, while the Federal Reserve did not begin raising rates until March 2022. Critics argued that policymakers were 'asleep at the switch.' Picerno acknowledges that regardless of whether this criticism is entirely fair, that memory continues to loom over policy discussions in 2026.

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Earlier this year, the prevailing view was that rising prices primarily reflected short-term economic impacts from the war with Iran, suggesting monetary policy should 'look through' such temporary supply disruptions without rushing to raise rates. This logic rests on an implicit premise: the shock is temporary, and price levels will fall. Picerno’s core argument is that this premise is being eroded by two simultaneously observable facts.

The first fact is the duration of the conflict. Since military actions against Iran began in February, the situation in the Middle East has persisted for eight months with no clear path to resolution. Energy markets have adjusted to adapt to sustained volatility in the Middle East and the unreliability of oil and gas exports from the region. More critically, Yemen’s Houthi rebels have expanded attacks on Saudi Arabia, the region’s dominant energy producer. Picerno contends that 'transitory' is increasingly looking like 'structural,' making the case for 'looking through' harder to sustain.

The second fact is the direction of growth. One counterargument is that further rises in energy costs would trigger 'demand destruction' by suppressing economic activity, thereby naturally curbing inflation. However, Picerno notes that the Atlanta Fed’s GDPNow model estimates U.S. third-quarter economic growth will accelerate from 2.2% in the second quarter to 3.5%. Accelerating growth means the buffer mechanism of demand destruction has not yet activated, stripping the logic of 'waiting for inflation to subside' of its supporting condition of economic deceleration.

The combined effect of these two facts is that supply shocks are persisting (rather than fading) and demand is accelerating (rather than shrinking). This is an early version of the 2021–2022 dynamic—supply-side pressures remain unresolved, and demand-side forces are not yet suppressed by interest rates or income effects. Picerno believes this makes the argument for 'looking through transitory shocks' increasingly difficult to maintain.

However, Picerno also leaves room for the opposing view. Loretta Mester, former president of the Federal Reserve Bank of Cleveland, told The New York Times that "the economics support another rate increase," while others argue the Federal Reserve should remain patient, waiting for energy inflation to naturally recede after tensions with Iran ease. Picerno responds: The 'wait-and-see' argument has been circulating since the initial outbreak of conflict, yet headline inflation levels continue to rise. If the conflict expands rather than contracts, what is the cost of waiting?

He ultimately frames the issue as one of credibility mechanisms rather than interest rate levels themselves. If investors believe that rate hikes are merely being postponed rather than ruled out, the decision to hold steady may not stabilize expectations but instead trigger renewed upward pressure on Treasury yields. In other words, Warsh’s core task tomorrow is not to make a rate decision, but to persuade the market that the Federal Reserve’s commitment to price stability has not wavered despite choosing inaction. Picerno judges that this persuasion task is becoming increasingly difficult because the two premises supporting 'waiting'—that the shock is temporary and growth will slow—are both being eroded by data.

For readers, there are two specific signals worth tracking: First, whether the initial estimate of U.S. third-quarter GDP released this week confirms the acceleration trend predicted by GDPNow; second, whether WTI crude oil breaks above recent highs and continues to rise. If both are confirmed, the framework of 'looking through transitory shocks' will struggle to provide sufficient justification for holding rates steady, and markets may reprice the path of rate hikes. Conversely, if the conflict sees substantial easing or growth unexpectedly weakens, the current interest rate range may indeed be adequate.

Sources

  • capitalspectator.com↗
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