International oil prices surge and plunge, is there still a possibility of Fed rate cuts this year?

From a intraday surge of over 30% to a single-day decline of more than 10%, international oil prices have experienced a period of sharp rises and falls. In just 10 days, oil prices shifted from a bear market to a bull market and then back to a bear market. The volatility in March reached its highest level in recent years.

The ongoing escalation of geopolitical tensions in the Middle East, the “disruption” of flow through the Strait of Hormuz, and multiple oil-producing countries announcing production cuts have all acted as catalysts for rising oil prices. Originally, global demand for oil was already tight; combined with the production cut announcements, this led to a persistent imbalance in the global oil supply and demand structure, directly fueling the surge in prices.

As international oil prices approached the $120 level, factors such as the G7’s plan to jointly release 300-400 million barrels from strategic reserves and expectations of easing Middle East tensions caused a significant correction. Prices sharply declined from $120 to around $80, turning the market from a bull to a bear.

Generally, when prices fall more than 20% from their peak, a technical bear market is considered to have begun. By this definition, oil prices dropping below $96 from $120 indicate a technical bear market. Currently, with prices around $80, a bear market has been firmly established.

Analyzing from the perspective of U.S. core interests, high oil prices are unfavorable for controlling inflation. The impact of oil prices on the U.S. CPI is mainly indirect. Although energy prices like oil account for only about 7% of the CPI, a sharp rise in oil prices can transmit inflationary effects through logistics costs, processing costs, and product prices.

From an inflation control standpoint, maintaining international oil prices within the $50 to $70 range would be ideal. Once prices break above $80, it could exert some upward pressure on U.S. inflation data. If oil prices surpass $100 or even $110, it could significantly raise inflation expectations and materially impact U.S. monetary policy.

By 2026, the global market faces considerable uncertainty. The volatile oil prices create many variables for the Federal Reserve’s interest rate decisions throughout the year. From another perspective, if international oil prices remain above $80 for an extended period, the expected inflation rate in the U.S. for the second and third quarters of this year could rise sharply, and the likelihood of the Fed cutting rates within the year would diminish.

Whether the Fed will cut rates in 2026 depends on upcoming U.S. inflation and non-farm employment data. A significant rise in inflation would be a decisive factor.

After experiencing sharp fluctuations, if oil prices can stabilize below $70, U.S. inflation would remain manageable, leaving room for rate cuts. Based on the most optimistic outlook, even if the Fed has room to cut rates, compared to 2025, the number and frequency of rate cuts in 2026 would likely decrease significantly. A single rate cut or maintaining the current federal funds rate would already be considered quite optimistic.

For the global market, 2026 may present more challenges than opportunities. In 2025, risk appetite might be relatively positive, with most assets in a bull market. However, compared to 2025, global inflation could rise noticeably in 2026, driven not only by rising crude oil prices but also by significant increases in the costs of key raw materials. Under the scenario of rising raw material costs, mid- and downstream industries may expect price hikes, which could eventually extend inflationary effects across various economic indicators. In the face of rising inflation expectations, the monetary environment may also undergo subtle changes.

Author’s note: Personal opinions only, for reference.