Goldman Sachs: Referencing the 1990 oil crisis, the Federal Reserve will eventually cut interest rates

As the Middle East conflict has sparked a spike in oil prices and stoked inflation concerns, the global interest-rate markets have recently seen a dramatic “hawkish repricing”—the market has shifted from betting on multiple rate cuts by the Federal Reserve at the start of the year to pricing rate hikes by year-end. Goldman Sachs is questioning one of the biggest market-pricing shifts of this year. The firm said investors have overestimated the likelihood that the Federal Reserve would raise rates in response to the current surge in oil prices. In a research note, Goldman Sachs strategist Dominic Wilson laid out the firm’s view: the market is overreacting to the oil shock, betting that the Federal Reserve will roll out tighter policy, but based on historical experience, this is unlikely to happen. The historical reference from 1990 is at the core of Goldman’s assessment. That year, when faced with an oil supply shock, bond-market yields jumped sharply, and investors bet that the Federal Reserve would tighten policy. But in the end, the Federal Reserve did the opposite, choosing rate cuts as economic conditions deteriorated. (China Finance Network)