Fed Faces Rate Cut Decision After Israel-Iran Oil Price Impact
Fed chair Jerome Powell could be factoring in changes to energy prices as he weighs an interest rate decision.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
As we head into another FOMC meeting, Federal Reserve Chair Jerome Powell is perhaps regretting another post conference call rant from President Trump pressuring him to cut rates, taunting him by calling him "too-late Powell."
It cannot be easy being the Fed chair, because no matter what you do, there will always be some who will disagree. It is best to perhaps stay the course and do what is needed. Given that markets are back at all-time highs following the April tariff tantrum, and the U.S. economy holding up, there really is no need to cut rates as even inflation is hovering close to the Fed's 2% target, not below it at all.
Rates are expected to be unchanged, but the rates market expects about 50 BPS of cuts by the end of 2025. Even that seems like just a remote possibility, judging by the recent data.
Retail Sales had held up well in April, but then we saw the 0.9% month-over-month drop in May, the biggest of this year so far and the first back-to-back monthly decline since the end of 2023. There was quite a bit of front running into the April tariff saga, which pulled in orders from May.
Even the Atlanta Fed's GDPNow for Q2 is forecasting a growth rate of 3.5%, compared to the disastrous numbers last month. The labor market is showing no signs of cracking, with unemployment holding at 4.2% and initial jobless claims averaging close to 2024 levels, while continuing claims remain slightly above last year's figures. The infamous recession has yet to appear. Of course, lower rates would help as it would lower the U.S. interest expense and allow borrowers to borrow more, as in the hay days of the post-COVID world. Governments got used to spending their way out of anything as rates were low, but today they will be burdened by issuing debt at much higher rates.
Another reason why Powell may want to hold off is that neither he nor the world knows where the price of oil can be as we seem to be in the midst of a standoff between Israel and Iran.
After Israel’s attack earlier this week, striking key nuclear facilities and scientists, both counties are now into the fifth day of attacks, as of this writing. Brent oil has rallied around 15% in a few days as it moved from $65 per barrel (BBL), all the way to $75 per bbl. Iran supplies about 3.3 million barrels per day (MBPD) of oil, so any curtailment of Iranian flows can become a huge issue for the oil market.
But as of now there is no change to oil flows nor is there any disruption in the Strait of Hormuz, where around 20 million barrels flow on a daily basis. But the market is "worried" that it could happen.
More than 80% of Iranian oil flows to China, so clearly the rise in prices does not bode well for the consuming country. But then China has stockpiled quite a bit of oil, being opportunistic and buying when prices are low, and using inventories when prices are high. President Trump is asking for unconditional ceasefire and an end to any enrichment of any uranium in Iran.
Whether Iran will give in is yet to be seen, but the country is burning under heavy fire. But one thing is certain, each day the price of oil stays here, makes the Fed's job much harder as the next CPI print will be much worse making it even harder for the Fed to contemplate a cut even if the U.S. consumer is slowing down; the Fed's worst nightmare, aka, stagflation!
If Trump wants lower rates, then he better lean toward a de-escalation very soon, especially if he also wants his "big, beautiful bill" to pass. According to the latest CBO analysis, the House tax-cut bill boosts the deficit by $2.8 trillion. This does not bode well for the bond market, and equities are looking exhausted here as they are inching close to the all-time highs of 6,100.
The market needs a new catalyst and it remains to be seen how the Q2 data are compared to consensus, when there is so much uncertainty still about tariffs and margins. The Fed will be rewarded to wait and see, just as investors will be.
