Military operations in the Middle East since Saturday, February 28 have disrupted monetary policy expectations, and the longer they last, the stronger their impact will be on forward-looking monetary policy.
Yet at the end of February, the outlook was rather positive. US inflation had just fallen to 2.4% (based on CPI), real-time inflation was low, and the market was expecting a cut in the US federal funds rate at the June monetary policy meeting, with Kevin Warsh taking the lead at the Federal Reserve. He was expected to benefit from a favorable price environment, but everything has been called into question by the conflict in the Middle East.
The upward impact on oil and natural gas prices has been significant due to the closure of the Strait of Hormuz and military strikes targeting oil and gas facilities around the Persian Gulf.
It is clear that rising energy prices will push nominal inflation higher, at least in the short term. There is, however, a key uncertainty: time. After about one month with oil above $90 (US crude oil used here as a benchmark), the impact becomes visible in short-term inflation.
If high energy prices persist for more than three months, the impact becomes more structural, spreading to the prices of many goods and services. That said, nothing is certain: if geopolitical tensions significantly slow global growth, downward pressure on prices could also emerge. For now, however, the focus remains on rising energy prices driven by geopolitics.
Is it still credible that the Fed will cut rates this summer under Kevin Warsh’s leadership? Yes, but only if the geopolitical and energy situation around the Persian Gulf and the Strait of Hormuz normalizes before the end of April.
Several indicators suggest that, at this stage, the market does not expect any Fed rate cuts before 2027. Of course, this situation may evolve rapidly:
• The trend of the US 2-year Treasury yield, which is considered the best indicator of expected Fed policy. The “US 2-year” has just risen above the current Fed rate, which almost signals that the market is not expecting rate cuts but possibly even rate hikes to counter a rebound in inflation
• The CME FedWatch Tool, based on futures contracts traded in Chicago on the US federal funds rate, shows that institutional investors do not expect any rate cuts before mid-2027
The table below shows the CME FedWatch Tool, with a market not expecting any rate cuts before the end of 2027:
The chart below shows the daily Japanese candlesticks of the US 2-year Treasury yield:
DISCLAIMER:
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only. The presented idea (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice. If you are a retail investor or lack experience in trading complex financial products, it is advisable to seek professional advice from licensed advisor before making any financial decisions.
This content is not intended to manipulate the market or encourage any specific financial behavior.
Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.
Swissquote and its employees and representatives shall in no event be held liable for any damages or losses arising directly or indirectly from decisions made on the basis of this content.
The use of any third-party brands or trademarks is for information only and does not imply endorsement by Swissquote, or that the trademark owner has authorised Swissquote to promote its products or services.
Swissquote is the marketing brand for the activities of Swissquote Bank Ltd (Switzerland) regulated by FINMA, Swissquote Capital Markets Limited regulated by CySEC (Cyprus), Swissquote Bank Europe SA (Luxembourg) regulated by the CSSF, Swissquote Ltd (UK) regulated by the FCA, Swissquote Financial Services (Malta) Ltd regulated by the Malta Financial Services Authority, Swissquote MEA Ltd. (UAE) regulated by the Dubai Financial Services Authority, Swissquote Pte Ltd (Singapore) regulated by the Monetary Authority of Singapore, Swissquote Asia Limited (Hong Kong) licensed by the Hong Kong Securities and Futures Commission (SFC) and Swissquote South Africa (Pty) Ltd supervised by the FSCA.
Products and services of Swissquote are only intended for those permitted to receive them under local law.
All investments carry a degree of risk. The risk of loss in trading or holding financial instruments can be substantial. The value of financial instruments, including but not limited to stocks, bonds, cryptocurrencies, and other assets, can fluctuate both upwards and downwards. There is a significant risk of financial loss when buying, selling, holding, staking, or investing in these instruments. SQBE makes no recommendations regarding any specific investment, transaction, or the use of any particular investment strategy.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts suffer capital losses when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high-risk tolerance. Make sure you understand each Digital Asset before you trade.
Cryptocurrencies are not considered legal tender in some jurisdictions and are subject to regulatory uncertainties.
The use of Internet-based systems can involve high risks, including, but not limited to, fraud, cyber-attacks, network and communication failures, as well as identity theft and phishing attacks related to crypto-assets.
Yet at the end of February, the outlook was rather positive. US inflation had just fallen to 2.4% (based on CPI), real-time inflation was low, and the market was expecting a cut in the US federal funds rate at the June monetary policy meeting, with Kevin Warsh taking the lead at the Federal Reserve. He was expected to benefit from a favorable price environment, but everything has been called into question by the conflict in the Middle East.
The upward impact on oil and natural gas prices has been significant due to the closure of the Strait of Hormuz and military strikes targeting oil and gas facilities around the Persian Gulf.
It is clear that rising energy prices will push nominal inflation higher, at least in the short term. There is, however, a key uncertainty: time. After about one month with oil above $90 (US crude oil used here as a benchmark), the impact becomes visible in short-term inflation.
If high energy prices persist for more than three months, the impact becomes more structural, spreading to the prices of many goods and services. That said, nothing is certain: if geopolitical tensions significantly slow global growth, downward pressure on prices could also emerge. For now, however, the focus remains on rising energy prices driven by geopolitics.
Is it still credible that the Fed will cut rates this summer under Kevin Warsh’s leadership? Yes, but only if the geopolitical and energy situation around the Persian Gulf and the Strait of Hormuz normalizes before the end of April.
Several indicators suggest that, at this stage, the market does not expect any Fed rate cuts before 2027. Of course, this situation may evolve rapidly:
• The trend of the US 2-year Treasury yield, which is considered the best indicator of expected Fed policy. The “US 2-year” has just risen above the current Fed rate, which almost signals that the market is not expecting rate cuts but possibly even rate hikes to counter a rebound in inflation
• The CME FedWatch Tool, based on futures contracts traded in Chicago on the US federal funds rate, shows that institutional investors do not expect any rate cuts before mid-2027
The table below shows the CME FedWatch Tool, with a market not expecting any rate cuts before the end of 2027:
The chart below shows the daily Japanese candlesticks of the US 2-year Treasury yield:
DISCLAIMER:
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only. The presented idea (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice. If you are a retail investor or lack experience in trading complex financial products, it is advisable to seek professional advice from licensed advisor before making any financial decisions.
This content is not intended to manipulate the market or encourage any specific financial behavior.
Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.
Swissquote and its employees and representatives shall in no event be held liable for any damages or losses arising directly or indirectly from decisions made on the basis of this content.
The use of any third-party brands or trademarks is for information only and does not imply endorsement by Swissquote, or that the trademark owner has authorised Swissquote to promote its products or services.
Swissquote is the marketing brand for the activities of Swissquote Bank Ltd (Switzerland) regulated by FINMA, Swissquote Capital Markets Limited regulated by CySEC (Cyprus), Swissquote Bank Europe SA (Luxembourg) regulated by the CSSF, Swissquote Ltd (UK) regulated by the FCA, Swissquote Financial Services (Malta) Ltd regulated by the Malta Financial Services Authority, Swissquote MEA Ltd. (UAE) regulated by the Dubai Financial Services Authority, Swissquote Pte Ltd (Singapore) regulated by the Monetary Authority of Singapore, Swissquote Asia Limited (Hong Kong) licensed by the Hong Kong Securities and Futures Commission (SFC) and Swissquote South Africa (Pty) Ltd supervised by the FSCA.
Products and services of Swissquote are only intended for those permitted to receive them under local law.
All investments carry a degree of risk. The risk of loss in trading or holding financial instruments can be substantial. The value of financial instruments, including but not limited to stocks, bonds, cryptocurrencies, and other assets, can fluctuate both upwards and downwards. There is a significant risk of financial loss when buying, selling, holding, staking, or investing in these instruments. SQBE makes no recommendations regarding any specific investment, transaction, or the use of any particular investment strategy.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts suffer capital losses when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high-risk tolerance. Make sure you understand each Digital Asset before you trade.
Cryptocurrencies are not considered legal tender in some jurisdictions and are subject to regulatory uncertainties.
The use of Internet-based systems can involve high risks, including, but not limited to, fraud, cyber-attacks, network and communication failures, as well as identity theft and phishing attacks related to crypto-assets.
This content is written by Vincent Ganne for Swissquote.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
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Exención de responsabilidad
La información y las publicaciones no constituyen, ni deben considerarse como, asesoramiento o recomendaciones financieras, de inversión, de trading u otro tipo, proporcionadas o respaldadas por TradingView. Obtenga más información en Condiciones de uso.
This content is written by Vincent Ganne for Swissquote.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
This content is intended for individuals who are familiar with financial markets and instruments and is for information purposes only and does not constitute investment, legal or tax advice.
Publicaciones relacionadas
Exención de responsabilidad
La información y las publicaciones no constituyen, ni deben considerarse como, asesoramiento o recomendaciones financieras, de inversión, de trading u otro tipo, proporcionadas o respaldadas por TradingView. Obtenga más información en Condiciones de uso.