Fed's Steady Rate Outlook: Energy Shock and Tariff Implications

Fed's steady rate outlook is reshaped by new energy shocks in the Straits of Hormuz and the role of tariffs in inflation.

Past Conflicts Heating Fed’s Stance

■Since February, U.S./Israel‑Iran tensions flipped expectations toward a hawkish stance.

■Intensifying conflicts pushed oil prices above $100, reigniting rate‑hike concerns.

Energy Shock and Oil Prices

■Rising tensions around the Straits of Hormuz pushed oil prices past $100.

■Volatility in energy prices may support a persistent inflationary trend.

Tariffs’ Soft Impact on Inflation

■New customs duties under Section 301 have stronger legal foundations compared to the IEEPA repeal.

■Historical data show tariffs have minimal impact on inflation.

Two Scenarios: Steady Rate vs. Tightening

■FOMC minutes present two scenarios:

- Quick inflation correction allowing rates to stay steady.

■Energy and AI demand pressures driving persistent inflation and requiring additional tightening.

Divergent Economist Views

■Rogier Quaedvlieg: "Rates will stay steady through the rest of the year, but September could be a realistic rate‑increase meeting."

■James Knightley: "Slow job growth and easing inflation lead nine Fed members to favor steady rates over hikes.

Year‑End Outlook

■A rapid easing of tensions around Iran in weeks is critical for rates to remain steady.

■Markets continue to expect Fed to keep policy rates steady through the summer.

Markets view that the combination of energy price volatility and the muted effect of tariffs on inflation keeps the probability of a steady Fed stance high. This scenario will reshape HFT real‑time reactions and swap market expectations for rate cuts.