Prof G Markets · 3 min · Oct 29, 2026

The Fed is watching for energy costs to spread into other prices

MGMichael Gapen · Chief U.S. Economist, Morgan Stanley

Michael Gapen says rate hikes cannot directly fix supply-driven oil inflation, so the Fed is watching for spillover into other prices.

In this episode

3:06 Microsoft limits AI spending to what its cash flow can support4 min
6:31 Google’s search growth raises questions about AI competition4 min
10:57 AI infrastructure funding may become harder to secure5 min
23:40 Gapen expects core inflation to stay above target into 20275 min
19:01The Fed is watching for energy costs to spread into other prices3 min
31:21 Microsoft's buyout plan could take headcount below pre-pandemic levels4 min

“So yes, gas prices go up and diesel goes up, but we want to prevent it from spilling over into other parts of the economy.”

MGMichael Gapenat 20:16 · Prof G Markets

Takeaways

Rate hikes cannot bring more oil to market.
The Fed is watching for energy costs to lift other prices.
Sticky inflation and a stable labor market reduce the urgency to act.

About this segment

Michael Gapen says rate hikes cannot directly fix supply-driven oil inflation, so the Fed is watching for spillover into other prices. He sees room to wait rather than hike aggressively.

MG

Chief U.S. Economist, Morgan Stanley

Ed Elson, Host

From “Microsoft Rises, Google Tanks: Why Investors Are Polarized On Big Tech”, Oct 29, 2026. Watch the full episode

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

19:14
If you're looking for a reason as to why the Fed stayed on hold, despite strong growth, despite a stable labor market, despite inflation being above target, you didn't really get one today. What do we think the reason? is? I mean, some have said there has been conjecture, at least, that maybe there was a political motive. This is the week before the midterms. Maybe, I mean, we know that the president is not a fan of raising rates. Do you think that could be it? Like, what do you think is the answer?
19:46
The policy-based answer, the real answer, in my opinion, is that most everyone on the committee who do speak from time to time and give their views are, I think, saying, look, a lot of this inflation is driven by supply-side forces that we can't really fix. In other words, the Fed raising rates doesn't bring more oil to markets. But so monetary policy isn't well-equipped to respond to every kind of inflation shock. But in this case, what you don't want or what you want to avoid, is high energy prices spilling over into the prices of other goods. It's what economists call leaning against the second round effects of higher energy prices. So yes, gas prices go up and diesel goes up, but we want to prevent it from spilling over into other parts of the economy.
20:37
What that means is you can raise rates, but what you tend to do is raise it less. So you don't respond to the increase of headline inflation. You lean against the wind. In doing so, you're not hiking as much. You probably do want to take some time to assess whether energy prices are flowing through into other parts of the economy through second-round effects. I think that's probably the main reason. That inflation, it's sticky, but it's come down. The labor market really isn't overheating. Yes, growth is solid. But the mix of all that says you can tighten policy, but there may not be a high degree of urgency. Again, that's roughly what I think 18 of the 19 participants are saying. Well, two, as you noted, voted in favor of a rate hike.