Central Banks Are Reacting to War, But the Bigger Risk Is Overreaction

State Street’s weekly macro note argues that policymakers are being pulled toward hawkishness by energy-driven inflation, even as growth risks are becoming harder to ignore. 

• The Fed, Bank of England, Bank of Japan and Reserve Bank of Australia all leaned more cautious or hawkish in response to the Iran conflict, but much of that may prove temporary if the shock fades.
• In the U.S., the report still sees room for rate cuts later this year, arguing that labor-market softness matters more than an oil-driven inflation spike.
• Australia stands out as especially exposed, with rising fuel prices, labor-market cracks and Treasury scenarios pointing to a meaningful demand-destruction risk if oil remains elevated.

If the conflict drags on, inflation may rise first—but the real policy challenge may be what breaks underneath it.