Over the past few weeks, oil markets have reminded investors just how quickly geopolitics can disrupt the global economy.  

With roughly a third of the world’s oil flowing through the Strait of Hormuz, even the possible threat of disruption has sent prices sharply higher. Brent crude oil has surged more than 50% while West Texas Intermediate crude oil has followed closely behind.

That kind of move gets attention. And it should. 

But as with most things in markets, the headline is only part of the story. The divergence between Brent and WTI tells us something very important.

The United States of America, now a net exporter of energy, is less exposed to foreign supply shocks than it was in prior decades. Europe and other import-heavy regions remain far more vulnerable to disruptions in global shipping lanes. Still, oil is priced globally. When supply tightens anywhere, price move everywhere. U.S. production does not exist in a vacuum, and increased global demand for American energy still pushes domestic prices higher.

In other words, we are insulated from oil shocks, but not immune. Historically, these types of oil dislocations have been short lived. Futures markets are already reflecting that expectation. In the vast majority of past geopolitical escalations, oil prices retraced within a matter of weeks or months as supply chains adjusted, alternative routes were secured, and risk premiums faded.

That context matters, because it helps frame what’s actually happening beneath the surface. 

Simply put, it’s a supply shock.

Global demand for oil hasn’t meaningfully changed over the past month. Businesses still need to operate. Consumers still need to drive. Airlines still need to fly. What has changed is the perceived reliability of supply. When access is threatened, prices rise to adjust based on available information at the time. 

That distinction is critical when thinking about inflation and, more importantly, how policymakers respond. 

The Federal Reserve has tools designed to influence demand. It can raise interest rates to slow borrowing, reduce spending, and ultimately cool economic activity. What it cannot do is produce more oil, reopen shipping lanes, or resolve geopolitical conflicts.

The Fed can only slow demand. It cannot fix supply.

And that is exactly why the current environment is so challenging. 

Inflation was already running above the Fed’s stated 2% target, but it had been trending in the right direction. The disinflationary process was underway. Now, this sudden spike in energy prices threatens to interrupt that progress, at least in the short term. Higher fuel costs ripple through the economy, increasing transportation expenses, input costs, and ultimately consumer prices. 

At the same time, the labor market is no longer as strong as it once was. 

The post-pandemic boom created one of the tightest labor markets in modern history. Job openings peaked at over 12 million in early 2022. Today, that number has fallen dramatically. Unemployment, while still relatively low by historical standards, has moved higher. Recent job growth has softened, with some months even turning negative. 

On the surface, it does not look alarming. But that is largely because productivity has been unexpectedly strong. Businesses are producing more output with fewer workers, masking some of the underlying weakness in hiring. At the same time, labor force participation continues to shift, which further complicates the picture. 

Strip that away, and the trend is extremely clear.

The labor market has cooled, so now the Fed is facing two competing realities: 

On one side, inflation risks are rising again due to an external, supply-driven shock.

On the other, the labor market is losing momentum, which would typically argue for easing policy. 

This is the definition of being between a rock and a hard place. 

Cut rates too soon, and the Fed risks fueling another wave of inflation, undermining the progress it has worked hard to achieve. Hold rates too high for too long, and it risks pushing a slowing labor market into a more pronounced downturn. 

There is no clean solution here. Only trade-offs. 

This is also where the broader conversation around the Fed’s 2% inflation target begins to resurface. 

For many investors, that number feels arbitrary. In reality, the formal 2% target is relatively recent. While the Federal Reserve has long operated under a mandate of price stability, it did not formally adopt a 2% inflation target until 2012. The goal was to provide clarity, anchor expectations, and avoid the risks associated with deflation. 

At the time, it made sense. The global economy was coming out of the financial crisis. Growth was sluggish. Inflation was persistently below target. The bigger concern was not running the economy too hot but the risk was running the economy too cool. 

Today’s environment is very different. 

We are operating in a more dynamic economy shaped by technological innovation, shifting demographics, and a much more active fiscal backdrop. Supply chains are being reconfigured. Globalization (in some cases de-globalization) is evolving. Artificial intelligence is beginning to influence productivity in ways that were not previously possible. 

Against that backdrop, it is fair to ask whether a strict 2% target is still the most appropriate benchmark. 

There is a growing argument that a slightly higher range, something closer to 2% to 3%, may better reflect the realities of the modern economy. Not because inflation should be ignored, but because moderate, stable inflation has historically coexisted with strong economic growth and healthy financial markets. 

In fact, when you step back and look over the past several decades, periods of moderate inflation have often aligned with solid returns across both equities and fixed income. The key has not been the exact level of inflation, but its stability. 

Predictable inflation allows businesses to plan, consumers to spend, and investors to allocate capital with confidence. Volatile inflation, on the other hand, creates uncertainty, distorts valuations, and increases the likelihood of policy mistakes. And that is ultimately the true risk in today’s environment. 

Not that inflation settles at 2.5% or even 3%, but that it becomes unpredictable, forcing the Fed into reactive decision-making. 

So far, the data suggests we are not there. Long-term inflation expectations remain well anchored. Markets are not signaling a loss of confidence in the Fed’s ability to manage inflation over time. Real wages are positive, meaning consumers are still maintaining purchasing power despite higher prices. 

That is an important distinction. It suggests that while inflation may be above target, it is not yet destabilizing the broader economy. 

Which brings us back to the Fed. 

Despite the growing debate, the 2% target is unlikely to change anytime soon. Not because it is perfect, but because credibility matters. Central banks rely heavily on trust. Shifting the goalposts in the middle of the game risks undermining that trust, even if the underlying rationale is sound. 

So instead, the Fed is left navigating within the existing framework, balancing its dual mandate of price stability and maximum employment in an environment where the signals are increasingly mixed. 

From a policy standpoint, that likely means patience. 

The Fed does not need to overreact to a temporary oil shock, especially one that history suggests may fade. At the same time, it cannot ignore the potential for higher energy prices to filter through into broader inflation measures. 

This is where nuance matters. Not all inflation is created equal. Supply-driven inflation, particularly from commodities like oil, tends to be more volatile and less responsive to interest rate policy. Demand-driven inflation is where the Fed has the most influence. 

Understanding that difference is key to interpreting what comes next. 

For investors, the takeaway is not to get caught up in the day-to-day headlines, but to focus on the underlying trends. 

Oil shocks come and go. Geopolitical tensions rise and fall. Policy cycles shift over time. What tends to persist are the fundamentals that drive long-term returns. 

And while the current environment is uncertain, it is not unprecedented. We have seen similar dynamics play out before. Each time, the details are different, but the underlying principles remain the same. 

The bigger question is not where inflation is today, but what “price stability” should mean going forward…

Is 2% still the right definition?