Global Economy: ECB and Fed Face the Oil Shock

Under this scenario, Middle Eastern shipping lanes return to normal operations thanks to international security guarantees and regional diplomatic agreements. The risk premium on crude quickly dissipates, pulling the price of Brent crude below $90 before year-end. Refiners gradually rebuild inventories without experiencing supply disruptions, easing pressure on fuel and intermediate goods prices. The swift drop in transportation costs helps rein in headline inflation without requiring prolonged fiscal austerity.

In contrast to expectations of rates staying higher for longer, this easing in commodity prices relieves central banks of their urgent constraints. Reassured by falling consumer price indices, the European Central Bank could halt further rate increases and consider rate cuts by late 2026 to support industrial recovery. Bond yields would drop sharply, bringing the French OAT yield well below the current 4.00%. Such a broad-based easing path would significantly bolster household purchasing power and productive investment in Europe.

This baseline scenario is driven by a persistent state of neither war nor peace in the Persian Gulf, keeping crude oil prices in a narrow range of $95 to $110. Shipping traffic remains slowed by prohibitively expensive insurance premiums and partial reroutings, without a complete physical disruption to supplies. Global inventories continue to draw down moderately, preventing any meaningful drop in retail fuel prices. Businesses absorb part of this shock through their operating margins while passing the rest on to end-consumer prices.

Faced with stubborn yet contained inflation, the ECB and the Federal Reserve choose to keep interest rates steady without initiating new easing or triggering market panic. Borrowing costs remain firmly anchored at current restrictive levels for several quarters, ruling out any prompt pivot toward rate cuts before 2027. Sovereign bond yields settle near recent highs, with the French OAT hovering around 4.00%. This stance of prolonged vigilance would stabilize market expectations without triggering an immediate stock market crash, at the cost of sluggish growth.

In this severe crisis scenario, armed hostilities trigger a near-total shutdown of the Strait of Hormuz, removing up to 4 million barrels per day from the global market in line with JPMorgan’s models. The price of Brent surges above $120, delivering a severe supply shock across all industrial and agricultural supply chains. Physical shortages of refined petroleum products spark immediate and disorderly price increases throughout international trade. Consumer price indices experience a sharp rebound that government fiscal cushions can no longer absorb.

Far from a wait-and-see pause, this supply shock would force the ECB and the Fed to vote for emergency rate hikes to defend their policy credibility against rising prices. This monetary tightening would plunge bond markets into a sharp selloff, driving the 10-year US Treasury yield past 5.50% and the French OAT above 4.50%. Squeezed between prohibitive energy costs and severe credit tightening, the Eurozone and the US economy would slide into an outright recession coupled with severe financial instability.