Hormuz relief reshapes Fed rate path

Falling oil prices after Iran said the Strait of Hormuz was open to commercial shipping have eased one of the sharpest inflation threats facing the US Federal Reserve, giving policymakers more room to consider rate cuts later this year if the decline in energy costs holds. Brent crude fell below $90 a barrel on Friday, April 17, for the first time since March 10, after dropping by more than 10% as markets responded to the reopening announcement and a temporary ceasefire in the Middle East.

That shift matters because higher oil prices had become a central reason for caution at the Fed. Only a day earlier, New York Fed President John Williams warned that the war-driven jump in fuel costs was already feeding through to airfare, groceries and fertiliser, with inflation likely to stay above 3% in the near term. San Francisco Fed President Mary Daly said on April 17 that a faster easing of the conflict could help the central bank continue moving inflation towards its 2% target, underscoring how closely officials are watching energy markets as they assess the next policy move.

Financial markets moved quickly to reflect that change in tone. Traders increased bets that the Fed could start cutting rates by December 2026 after previously assuming borrowing costs might stay elevated well into 2027. Reuters reported that the reopening of Hormuz and the slide in crude had altered interest-rate expectations, while separate market coverage showed investors moving out of safe-haven positions, sending stocks higher, bond yields lower and the dollar down.

The Fed’s benchmark rate remains at 3.50% to 3.75%, and the central bank is still far from declaring victory over inflation. March consumer price data showed annual inflation at 3.3%, the highest in two years, with gasoline costs playing a major role in the increase. Wholesale prices also accelerated, adding to concern that the oil shock from the Middle East conflict could broaden into a wider cost problem for households and businesses. Even with crude now falling sharply, policymakers are unlikely to treat one day’s market move as decisive proof that price pressures have broken.

That caution helps explain why the debate over rate cuts remains unsettled. Deutsche Bank said on April 17 that it now expects no Fed cuts at all in 2026, reversing an earlier forecast for a September reduction. J. P. Morgan and HSBC were also described as expecting no cuts, while Goldman Sachs, Morgan Stanley and BofA Global Research were still looking for two reductions beginning in September. LSEG data cited by Reuters showed that markets still assign a strong chance to no cut by year-end, even after Friday’s relief rally.

Much depends on whether the drop in oil prices proves durable. Analysts have warned that the market may be underestimating the physical damage done by weeks of conflict. Reuters reported that more than $50 billion worth of crude has gone unproduced since late February and that the recovery of regional production could take months, with some refining and gas infrastructure damage likely to take far longer to repair. The International Energy Agency said on April 17 that lost Middle East energy output could take about two years to recover fully, suggesting that supply risks have not vanished simply because ships are allowed through Hormuz again.

That leaves the Fed facing a narrower but still complicated path. If Brent remains under $90 and moves lower, it could reduce pressure on transport, manufacturing and household fuel bills, giving officials greater confidence that March’s inflation spike will not become entrenched. Lower energy costs could also support consumer spending by easing pressure on real wages, which were hit as prices climbed. Yet if shipping disruptions persist, insurance costs stay high, or the ceasefire falters, the relief could fade quickly and revive the case for holding rates higher for longer.