Analysis: Energy Prices Become Key Variable in Fed Policy Path

On April 29, Thomas Hulick, CEO of Strategy Asset Managers, stated that with the market widely expecting Federal Reserve Chairman Powell and the Federal Open Market Committee to keep interest rates unchanged, the current key variable is energy. Futures markets indicate that expectations of oil prices above $85 are continuing to drive up inflation expectations and exacerbate intraday fluctuations in U.S. Treasury yields. As long as the tensions in the Middle East involving Iran and the blockade issues in the Strait of Hormuz remain unresolved, the bond market will continue to be sensitive to inflation risks. ‘This is why we are still hearing discussions about a possible rate hike later this year,’ he added. To normalize yields, oil prices may need to fall back to the $70 per barrel range. ‘Once energy prices stabilize, inflation expectations should decline accordingly, allowing U.S. Treasury yields to return to more fundamental levels.’ (Jin Shi)