Expectations that the Federal Reserve would resume interest rate cuts before September eroded further on Tuesday, as rising oil prices from the U.S.-Israeli air war against Iran heightened concern that inflation pressures would keep the central bank in a hawkish posture.
Interest rate futures and Treasury securities saw fierce selling for a second straight day after the launch of air strikes against Tehran over the weekend that killed the country’s long-time leader. With the crucial Strait of Hormuz closed to traffic and the flow of 20% of the world’s crude oil effectively shut off for an indeterminate time, U.S. oil prices have surged by more than 13% since Friday.
While the U.S. economy is far less sensitive to oil than it was during the 1970s oil price shocks, it nevertheless poses a risk to headline inflation through higher energy prices. Indeed, retail gasoline prices jumped 10 cents a gallon in the last 24 hours, according to AAA, with prospects high for more increases in the near term.
The rate futures selloff knocked down to around 35% the prospects for a Fed rate cut in June when Kevin Warsh – President Donald Trump’s nominee to succeed Fed Chair Jerome Powell – would lead a policy-setting meeting for the first time. Moreover, traders currently see only a 55% chance of a cut by July, down from more than 70% in recent days.
The perceived chance of further easing beyond an initial cut is dropping as well, with rate traders pricing in only about a 56% chance of a second rate cut by December.
Reporting By Dan Burns and Ann Saphir; Editing by Chizu Nomiyama; This article originally appeared on The Detroit News: Iran fallout pushes market views of next Fed rate cut further away. Reporting by Reuters / The Detroit News. Distributed by USA TODAY Network via Reuters Connect
