Financial markets moved to lower odds of near-term Federal Reserve easing on Tuesday, as a spike in oil prices tied to the U.S.-Israeli air campaign against Iran fed concerns that inflation pressures will keep policy tighter for longer.
Interest rate futures and U.S. Treasury securities experienced intense selling for a second consecutive day following air strikes on Tehran over the weekend that killed the country's long-time leader. The strikes and ensuing regional disruption have led to the closure of the Strait of Hormuz to maritime traffic and halted roughly 20% of the world\'s crude oil supply for an indeterminate period, according to the reported developments.
U.S. benchmark crude has climbed more than 13% since Friday, reflecting the tightened supply outlook. Retail gasoline prices have already reacted, with AAA reporting a 10 cent per gallon increase in the past 24 hours and a strong likelihood of additional near-term increases.
Analysts and traders note that while the U.S. economy is less vulnerable to oil shocks than it was during the 1970s, a rapid rise in energy costs still poses a direct risk to headline inflation and could complicate the Federal Reserve\'s path toward easing monetary policy.
Rate futures moves have altered market pricing for upcoming Fed decisions. The chance of a rate reduction in June - the meeting slated to be chaired by Kevin Warsh, President Donald Trump\'s nominee to replace Fed Chair Jerome Powell - has fallen to about 35% from higher levels seen earlier in the month. Expectations for a July cut also weakened, with traders putting roughly a 55% probability on easing by that month, down from better than 70% in recent days.
Market participants have also pared back expectations for additional cuts beyond an initial easing. As of Tuesday\'s trade, rate traders were pricing in about a 56% probability of a second rate cut by December, a decline from prior assumptions that more extensive easing would follow.
The combination of a substantial jump in crude prices, a direct hit to a critical shipping lane, and aggressive selling in interest-rate-sensitive instruments has reshaped near-term policy expectations. That shift has translated into heightened volatility across fixed income markets and renewed attention to how energy-driven headline inflation could affect the timing and scale of Fed easing.
Clear summary: Air strikes linked to the U.S.-Israeli campaign against Iran pushed oil prices sharply higher and prompted severe selling in interest-rate-sensitive assets. With the Strait of Hormuz closed and about 20% of global crude flows halted, markets have reduced the likelihood of a Federal Reserve rate cut before September, lowering the perceived probability of a June cut to roughly 35% and trimming expectations for subsequent easing.