The Fed Steps Forward as the Oil Shock Steps Back

• Interest rate expectations have moderated following the Hormuz deal, with markets now pricing in one 25-basis-point hike by March 2027, down from expectations of a full rate hike by year-end
• The Dallas Fed Weekly Economic Index forecasts 1-year ahead growth at 2.9%, with the labor market running above breakeven, suggesting the economy remains robust despite recent geopolitical uncertainty
• Chair Warsh is expected to leave rates unchanged while signaling a hike by end of 2026, though his opposition to forward guidance may create volatility as he avoids committing to a specific policy path

Summary

Key Development: A US/Iran agreement to reopen the Strait of Hormuz has resolved the geopolitical crisis that pressured markets in recent months, shifting focus to the Federal Reserve's first FOMC meeting under Chair Warsh.

Economic Data: The Dallas Fed Weekly Economic Index forecasts 1-year ahead growth at 2.9%, indicating strong underlying economic momentum. The labor market remains above breakeven levels, suggesting continued strength.

Market Implications: Interest rate markets initially priced in one full rate hike by year-end but have scaled back expectations following the Hormuz deal. Current market pricing points to one 25-basis-point hike by March 2027, reflecting reduced urgency as energy prices ease.

Fed Policy Outlook: Analysts expect the Warsh committee to:

• Leave the fed funds rate unchanged at the upcoming meeting
• Signal a potential hike by end of 2026 in the dot plot
• Show higher inflation expectations versus the March meeting
• Emphasize "price stability" over other mandate objectives

Key Risk Factor: Despite easing oil prices, the cumulative pass-through from months of elevated energy costs has not fully unwound, making it premature to declare victory over inflation.

Potential Volatility: Chair Warsh opposes forward guidance, preferring policy flexibility. His press conference approach—acknowledging data without committing to a specific policy path—could induce near-term volatility in rate markets as reporters probe on timing and conditions for future hikes.

Sector Impact: Energy markets and rate-sensitive sectors will be most affected by these developments, with the hawkish stance largely priced into current interest rate markets.