May 2026 - Oil, Inflation, and the Fed: What Happens Next?

Dear Investors and Friends,

In recent weeks, rising geopolitical tensions, particularly involving Iran, have contributed to a meaningful increase in oil prices. That move has already begun to show up in economic data. Headline inflation has moved higher, driven largely by energy costs, while core inflation has remained relatively stable.

At the same time, the Federal Reserve’s policy rate sits in a range that is generally considered slightly restrictive. It is above what most would view as neutral, but not so high as to materially constrain economic activity on its own.

Taken together, these developments raise a central question: what happens next for inflation, growth, and interest rates?

Oil Shocks Do Not Lead to One Outcome

Oil price shocks are often interpreted through a single lens: higher oil leads to higher inflation. That relationship is real, but it is incomplete. In practice, oil shocks introduce multiple forces into the economy that unfold over time.

The two most important forces are:

• Inflationary: Higher energy costs flow quickly into headline inflation and can, over time, influence the price of goods and services more broadly
• Contractionary: Higher energy costs act as a tax on consumers and businesses, reducing discretionary spending and compressing margins

These forces do not operate at the same speed. Inflation appears first. Growth effects tend to follow.

As a result, the initial data often reflects only the first phase of the adjustment.

What the Recent Data Is Actually Telling Us

The recent rise in headline inflation is consistent with what history would suggest. Energy prices move first, and they move quickly.

More important is what has not yet happened. Core inflation, which reflects the broader pricing behavior of the economy, has not meaningfully accelerated. Wages and inflation expectations have remained relatively stable, and there is not yet clear evidence of a meaningful slowdown in economic activity.

This is an early-stage environment where the first signal is visible, but the ultimate outcome is not yet clear.

Three Potential Paths from Here, and What They Mean for the Fed

From this point, there are three plausible paths, each with different implications for monetary policy.

• Contained inflation: The impact of higher energy prices remains limited. Inflation stabilizes, and the economy absorbs the shock without significant disruption. In this case, the Federal Reserve is likely to maintain its current stance in the near term and may eventually begin to ease policy as inflation pressures subside.
• Moderate inflation with slower growth: Higher costs begin to spread, but growth also starts to weaken. This creates a more complex environment in which policy cannot easily address both challenges at once. In such periods, the Federal Reserve often remains on hold, allowing time and economic adjustment to resolve the imbalance.
• More persistent, embedded inflation: Higher costs spread more broadly through the economy. Businesses raise prices, wages respond, and inflation becomes more durable. In that environment, the Federal Reserve would likely need to maintain a more restrictive posture for longer and could potentially tighten further if inflation proves difficult to contain.

Each path leads to a different policy response, but all share one characteristic: the Federal Reserve is unlikely to react quickly.

History suggests that the middle path, where both inflation and growth pressures are present, is the most likely outcome.

How We Would Frame the Probabilities

While no outcome can be known with certainty, it is possible to frame the relative likelihood of each path based on current data and historical experience.

• Contained inflation (Fed ultimately able to ease): approximately 55–60%
• Moderate inflation with slower growth (Fed on hold longer): approximately 25–30%
• More persistent, embedded inflation (Fed remains restrictive, with a low probability of further tightening): approximately 10–15%

These are not forecasts. They are a way of recognizing that multiple outcomes are possible, with different probabilities.

Even in the less likely scenarios, economic adjustments tend to unfold over months, not days.

Why Policy Matters, But Does Not Decide the Outcome

One important feature of the current environment is that monetary policy is already somewhat restrictive. This reduces the need for immediate action, as the Federal Reserve can observe whether inflation pressures spread more broadly before responding.

At the same time, a slightly restrictive policy stance increases the likelihood that any slowdown in growth may become more visible over time.

Policy is already leaning against inflation, which raises the bar for further tightening and increases the importance of time.

In other words, policy is not neutral, but it is also not extreme.

Why We Do Not Build Portfolios Around a Single Outcome

It is tempting to anchor on a single narrative: inflation is returning, growth is slowing, rates are going higher, or rates are going lower. History suggests that these narratives tend to change.

At Roosevelt Capital Management, we do not build portfolios around any single expected outcome. Even when probabilities can be framed, the range of possible outcomes remains wide. We do not bet on a single path. We prepare for several.

RCM’s Approach: Timeless Risk Management Principles

Our approach is grounded in timeless, proven risk management principles. We construct portfolios of individual bonds with defined maturities, not because we believe we can predict the direction of interest rates, but because we know that, by definition, our predictions will be wrong at times.

By diversifying across maturities, we manage both interest rate risk and reinvestment risk. A laddered structure ensures that a portion of the portfolio is consistently maturing, providing liquidity and the ability to reinvest as conditions change. This approach is designed not to be right in the short term, but to be resilient over the medium and long term.

If interest rates fall sharply, longer duration assets may outperform. If rates rise, the shortest assets may appear most attractive. Over full market cycles, however, these principles have consistently proven effective.

The Takeaway

The recent rise in oil prices has introduced uncertainty into the outlook for inflation, growth, and monetary policy. The early data reflects the first phase of that adjustment, not its final outcome.

Multiple paths remain possible. Some are more likely than others. None are certain. In environments like this, discipline matters more than prediction.

With gratitude,

David and Mike

Disclaimer

Roosevelt Capital Management LLC is a registered investment adviser. The information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. 

Past performance is not indicative of future performance. Principal value and investment return will fluctuate. No guarantees or assurances that the target returns will be achieved, or objectives will be met are implied. Future returns may differ significantly from past returns due to many different factors. Investments involve risk and the possibility of loss of principal.

While all the values used in this report were obtained from sources believed to be reliable, all calculations that underly numbers shown in this report believed to be accurate, and all assumptions made in this report believed to be reasonable, Roosevelt Capital Management LLC neither represents nor warrants the values, calculations or assumptions and encourages each prospective investor to conduct their own review of the audits, values, calculations and assumptions.