The 1970s oil-shock playbook needs an update: The inflation costs remain, but the employment risks appear far smaller than they did 50 years ago.

Why it matters: As the Iran war continues, there are early signs of renewed strength in the labor market.

• If energy disruptions pose less of a risk to jobs, the challenge for central banks shifts from managing stagflation risks to guarding against renewed price pressures.

That's the takeaway from new Federal Reserve Bank of Boston research that finds an oil shock the size of what the Iran war has produced would push inflation materially higher while having essentially no effect on national employment.

What they're saying: "The U.S. economy's vulnerability to oil shocks has not been eliminated, but rather reconfigured," economists wrote in the report. "Oil shocks may now pose less of a challenge for monetary policy, allowing policymakers to focus more on the greater risk to inflation."

Driving the news: The researchers estimate that the U.S.-Iran conflict generated a 33% oil price shock — a magnitude that is historically significant, though not unprecedented.

• The U.S. economy is now structured differently than past energy crises, allowing it to absorb a shock of that magnitude with far less damage to national employment.
• But with a smaller hit to growth and employment, there is less downward pressure on prices to counteract rising energy costs.
• The Boston Fed estimates that if an oil disruption like today's hit during the mid-1970s, it would lift the Personal Consumption Expenditures Price Index by 2.2 percentage points and reduce national employment by 1.8 percentage point.

What to watch: The oil shock is estimated to create relative winners and losers across the country, with oil-producing states faring better than oil-importing regions — differences that can leave an economic mark for as long as two years after the initial hit.

• The Boston Fed estimates that employment growth in Texas would be roughly 1.7 percentage point higher than in the average state 12 months after the shock. Massachusetts, meanwhile, would see employment growth run about 0.4 percentage point below average.
• Those effects extend beyond jobs: Home price growth in Texas would outpace the average state by roughly 1.8 percentage point, while Massachusetts would trail by about 0.4 percentage point.

The intrigue: The inflation effects of the shock are already evident in economic data, as well as in anecdotes gathered across Fed districts.

• The Beige Book, a collection of anecdotes from the 12 Fed regional banks, described energy costs tied to the Middle East conflict as the "primary driver of inflationary pressures," with spillovers into shipping, groceries and fertilizer.
• Yet employment showed little change across 11 of the Fed's 12 districts, and most described a "low-hire, low-fire" labor market.

The bottom line: Energy producers don't appear to view the price spike as durable, potentially limiting one of the channels through which oil-producing states benefit from higher energy prices.

• Dallas Fed contacts reported "limited appetite to increase activity even amid sharply higher oil prices," reflecting a view that the impact of the conflict is "likely to be too short-lived to spur new capital investment," according to the Beige Book.

Emily Peck contributed reporting.

With a steady labor market and still-high inflation, two Fed officials are on the record this week noting that the next rate move might be up, not down.

What they're saying: In a speech in El Paso yesterday, Dallas Fed president Lorie Logan said that consumer spending remains robust, corporate earnings are "going gangbusters" and the AI investment was continuing to boom.

• "These conditions indicate that monetary policy is not restraining the economy," she said.
• "I am increasingly concerned that higher interest rates could be necessary later this year to fully restore price stability and appropriately balance both sides of the Fed's dual mandate."

The intrigue: Notably, Logan said that "the U.S. economy as a whole has weathered the shock so far," even as higher energy prices weigh on lower-income households.

The big picture: After five years of above-target inflation, Fed officials worry that businesses, workers and markets will start pricing in higher inflation permanently, making the path back to 2% steeper and more costly to travel.

• "For today, it's reasonable to keep rates steady given the uncertainties around the economic outlook," Cleveland Fed president Beth Hammack said in a speech earlier this week. "But if recent trends continue, it may soon be appropriate to act."
• Both Logan and Hammack were among the three Fed presidents who dissented at the Fed's last monetary policy meeting, preferring to drop language in the statement signaling the next move could be a cut.
• "Based on the data, I'm more concerned about the growing risks of persistently elevated inflation than the risks to full employment and also that monetary policy may not be sufficiently restrictive to bring inflation down to 2%," Hammack said.
• "If we wait for definitive evidence that high inflation has become embedded in the economy, it may require larger policy adjustments, at greater cost."

The bottom line: Concerns are rising among Fed officials about whether policy is tight enough to keep inflation at bay, ahead of Kevin Warsh's first meeting as Fed chair later this month.