Recent shifts in global financial market expectations regarding the Federal Reserve's monetary policy path have become increasingly apparent. According to John Williams and David Tan, directors at BNY Mellon, the latest Fed meeting minutes and official statements indicate that U.S. interest rates face heightened "two-way risks," meaning the future holds not only potential rate cuts but also the possibility of renewed rate hikes.
Consequently, the institution has withdrawn its previous forecast for two rate cuts in 2026. It now suggests that if crude oil transport through the Strait of Hormuz does not return to normal before this summer, the Fed may keep interest rates at their current levels. The minutes from the May Federal Open Market Committee (FOMC) meeting, recently released by the Fed, were perceived by the market as distinctly hawkish. They revealed that committee members' concerns about inflation risks were more significant than previously anticipated by the market.
Analysts point out that the internal discussions during this meeting were more cautious than the market initially believed, particularly regarding inflation and energy price risks. The Fed has internally begun reassessing the possibility of long-term inflation spiraling out of control.
Simultaneously, recent remarks by Fed Governor Christopher Waller have further reinforced market expectations for a hawkish stance. Waller, previously a key proponent of accommodative policy due to concerns about a slowing labor market, stated in a public speech last week that the probabilities of U.S. interest rates rising or falling in the future are "equally likely." He specifically emphasized the risk of short-term inflation expectations spreading into long-term inflation.
This statement has been interpreted by the market as a significant increase in discussions within the Fed about the potential for future rate hikes. The primary factors driving the market's reassessment of the Fed's policy path recently stem from Middle East tensions and the risk of rising international oil prices.
Currently, negotiations between the U.S. and Iran concerning the security of the Strait of Hormuz remain highly uncertain. Although both sides are still advancing a ceasefire framework, the market worries that if normal transport through the Strait of Hormuz cannot be restored, global energy supply could continue to be impacted. The strait handles approximately 20% of the world's seaborne crude oil shipments, so any disruption could quickly drive up international oil prices. Oil prices have rebounded notably recently, with WTI crude returning to around $90 per barrel.
The market is concerned that high oil prices could reignite U.S. inflation, potentially forcing the Fed to maintain a high-interest-rate environment for a longer period. BNY Mellon notes that if crude oil transport in the Persian Gulf normalizes in the future, market expectations for rate cuts could rekindle. However, given the current unresolved energy supply risks, the Fed is more likely to maintain a wait-and-see approach.
The institution also believes that the upcoming U.S. Personal Consumption Expenditures (PCE) price index data, due this week, may further indicate that U.S. consumer prices are accelerating again. As one of the Fed's most closely watched core inflation indicators, the PCE data will directly influence market judgments about future monetary policy.
If the PCE data shows U.S. inflation continuing to heat up, the market may further strengthen expectations for "higher for longer" interest rates, thereby pushing the U.S. Dollar Index and U.S. Treasury yields higher. Recently, U.S. economic data has generally remained resilient, particularly in the labor market and consumer spending, which also provides room for the Fed to maintain its hawkish stance.
Market data shows that investors have already begun significantly reducing their bets on future rate cuts. U.S. Treasury yields have remained elevated, and the U.S. Dollar Index has regained its footing above the 99 level.
From a daily chart perspective, the U.S. Dollar Index found support near 97.80 and has continued to rebound, with the overall trend now shifting back to a stronger structure. The MACD indicator is gradually returning to near the zero axis, suggesting bearish momentum is weakening. Key resistance levels above are currently located in the 99.50 and 100.20 regions. A subsequent break above the 100 level could further open the door for upward movement.
Overall, the market is currently reassessing the risks associated with the "high oil prices—high inflation—high interest rates" chain. The situation in the Strait of Hormuz has become a crucial core variable influencing global financial markets at present.
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