Hormuz Deal Eases Oil Shock; Markets Expect Fed Pause
A US-Iran deal reopening the Strait of Hormuz cut near-term oil risk and eased inflation pressures. Markets now expect the Fed under Chair Warsh to keep rates unchanged.
The US-Iran agreement to reopen the Strait of Hormuz reduced near-term energy supply risk and helped push oil prices lower. Markets reacted by trimming expectations for near-term interest-rate increases ahead of the first Federal Open Market Committee meeting under Chair Warsh.
Interest-rate markets that had priced a full rate increase by year-end now point to a single 25-basis-point hike by March 2027, according to futures and swap pricing.
The deal eased oil-driven inflation pressures, but economic indicators show ongoing strength. The Dallas Fed’s Weekly Economic Index, which forecasts one-year-ahead growth, stood at 2.9%.
A June 15 advisory expects the FOMC to leave the federal funds rate unchanged at the meeting and projects the committee’s dot plot will indicate at least one hike by the end of 2026. The advisory also anticipates the Summary of Economic Projections will report higher inflation expectations than in March.
Analysts note that months of elevated energy costs have a cumulative effect that has not fully flowed through core inflation measures. Lower oil prices reduce near-term upside pressure on inflation, while the pass-through from earlier price spikes may continue to influence core measures in coming quarters.
Warsh has opposed formal forward guidance and favors keeping policy options open. Market participants expect the post-meeting remarks and the press conference to be the main source of new information about the committee’s likely path for future rate moves.
Markets are positioned for a pause, so any signal of a quicker return to tightening would probably push Treasury yields higher; language stressing data dependence and optionality would likely limit immediate moves in rates and risk assets.
Reopening the Strait of Hormuz removed a major geopolitical overhang that had driven recent energy-price volatility. Policymakers now weigh easing commodity pressures against persistent domestic demand and a tight labor market when setting policy.
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