Wolfe Research has warned that rising oil prices linked to the Iran conflict could increase the risk of policy mistakes by major global central banks, according to a recent research note.
The firm said U.S. equity markets have so far shown limited reaction to higher energy prices, while long-dated government bond yields and central bank rate expectations in futures markets have moved more closely in line with oil prices since the conflict began.
Energy Independence Shields the U.S. More Than Other Regions
According to Wolfe Research, the divergence reflects the relative energy independence of the United States compared with Europe and Asia, which remain significantly more reliant on imported energy supplies.
The report said higher energy costs are likely to have a greater negative effect on economic growth in those regions because of their stronger dependence on external fuel imports.
Global Central Banks Could Diverge From the Fed
Wolfe Research noted that several major central banks have held policy meetings over the past month, raising the possibility that monetary policy outside the United States could increasingly diverge from the approach taken by the Federal Reserve.
The firm said one potential scenario would involve global central banks tightening policy while the Fed either keeps interest rates unchanged or eventually cuts them.
Bank of Japan Vote Signals Growing Internal Division
The report highlighted the latest policy meeting at the Bank of Japan, where policymakers voted 6-3 in favor of keeping rates unchanged.
Wolfe Research said the split represented the largest disagreement among board members since Governor Kazuo Ueda took office in 2023, potentially signaling rising pressure within the central bank to move toward additional rate increases.
Yen Strength Could Trigger Market Volatility
The firm warned that if the Bank of Japan responds more aggressively to persistent inflation than futures markets currently anticipate — markets are currently pricing in roughly two additional rate hikes — a sharp strengthening of the Japanese yen against the U.S. dollar could trigger another unwind of carry trades or broader market disruption.
Policy Errors Seen as Key Threat to Market Rally
According to Wolfe Research, the two main risks that could interrupt the current rally in financial markets are central bank policy mistakes — particularly tightening policy in response to what may prove to be temporary energy-driven inflation — and the possibility of a disorderly carry trade unwind.