Iran Conflict Pushes Back Expectations for Next Fed Rate Cut

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Expectations that the Federal Reserve would resume interest rate cuts before September have eroded further, as rising oil prices from the U.S.-Israeli air war against Iran have heightened concerns about inflation pressures. The rate futures selloff has reduced the prospects for a Fed rate cut in June when President Trump's nominee Kevin Warsh would lead a policy-setting meeting for the first time. Traders now see only a 55% chance of a cut by July, down from more than 70% in recent days, and the perceived chance of further easing beyond an initial cut is dropping as well.

Why it matters

While the U.S. economy is less sensitive to oil prices than in the 1970s, higher energy costs still pose a risk to headline inflation. The Fed is closely watching inflation indicators and may be reluctant to cut rates if oil price spikes lead to higher consumer prices, even as economic growth shows signs of slowing.

The details

The launch of air strikes against Tehran over the weekend that killed Iran's long-time leader has effectively shut off 20% of the world's crude oil supply through the closure of the crucial Strait of Hormuz. U.S. oil prices have surged by more than 13% since Friday, and retail gasoline prices jumped 10 cents a gallon in the last 24 hours, with prospects high for more increases in the near term.

• The U.S.-Israeli air strikes against Iran occurred over the weekend.
• U.S. oil prices have surged by more than 13% since last Friday.
• Retail gasoline prices jumped 10 cents per gallon in the last 24 hours.

What’s next

The Federal Reserve will hold its next policy-setting meeting in June, when Kevin Warsh would lead the meeting for the first time if confirmed as the new Fed Chair.