Middle East conflict awakens the rate cut dream? Bank of America: Even if a ceasefire occurs, the Federal Reserve may still raise interest rates

Cailian Press, March 26 (Editor Liu Rui) — According to analysts from Bank of America Securities, even if the Iran war ceasefire holds, if energy prices do not quickly fall back to pre-war levels and WTI crude oil prices remain above $80 per barrel, the Federal Reserve may still adopt a more hawkish policy stance.

Are oil prices still unlikely to fall quickly?

Aditya Bhave and his team at Bank of America believe that since the outbreak of the Iran war in late February, international oil prices have remained high, putting the Federal Reserve in a “hawkish” zone.

On Wednesday, Eastern US time, the White House stated that negotiations with Iran are “still ongoing and productive,” prompting Trump to instruct the Department of Defense to delay strikes on Iran’s electricity and energy infrastructure. With expectations that the Middle East conflict may be resolved, international oil prices have noticeably retreated.

As a result, the settlement price for WTI May futures closed Wednesday at $90.32 per barrel, down 2.2%; Brent May crude futures settled at $102.22 per barrel, down 2.17%.

However, many industry experts worry that even if the Iran war ceasefire holds, the extensive damage to oil and gas infrastructure in the Middle East makes it difficult to quickly push prices back to pre-war levels — before the war, WTI was hovering around $65 per barrel.

High oil prices will still prompt the Fed to raise interest rates

Bank of America states that if the average price of WTI crude remains between $80 and $100 per barrel, a rate hike by the Fed “is the most likely scenario.”

After the Iran conflict erupted, the passage through the Strait of Hormuz was effectively blocked. Located in southern Iran, this strait is a crucial route for about one-fifth of global oil transportation.

This has triggered a surge in energy prices, raising concerns about rising inflation pressures worldwide. In the US, gasoline prices at the pump have already risen sharply and could influence overall price levels in the coming months.

A recent survey by S&P Global found that more US companies are facing significant increases in raw material costs.

“Multiple outcomes are possible — for example, a sustained but moderate oil price shock — in which case, the Fed would become more hawkish because it is more concerned about inflation,” said Bank of America analysts. “Although rate hikes are far from our baseline expectation, they are a risk to consider.”

What other possible outcomes?

However, Bank of America analysts point out that the Fed may face “several” different scenarios.

For example, if the oil price shock is temporary and prices can quickly fall back, the initial surge in inflation would dissipate rapidly as consumers reduce spending, thereby easing demand for gasoline.

Additionally, they note that if US stock markets experience a sell-off leading to negative wealth effects, this would increase downside risks to US employment — which is another key part of the Fed’s dual mandate — and in such cases, the Fed would likely adopt a more cautious stance.

(Cailian Press, Liu Rui)