To The Moon

Former U.S. Treasury Secretary and former Federal Reserve Chair Janet Yellen stated that although a sharp rise in oil prices triggered by renewed Middle East geopolitical conflicts has cast a shadow over the U.S. and global economic outlook, she still believes the Federal Reserve may resume interest rate cuts later this year. However, in stark contrast to Yellen’s support for rate cuts this year, swap and futures markets have completely abandoned bets on Fed rate cuts in 2024, with some traders even beginning to price in the possibility of a rate hike by the end of 2026. Speaking at the HSBC Global Investment Summit in Hong Kong on Wednesday, Yellen said, "This is actually a broad supply-side shock, with effects spreading from gasoline prices to liquefied natural gas, fertilizers, food, shipping costs, and broader semiconductor products, rather than another round of runaway inflation." Yellen noted that while the possibility of rate hikes cannot be entirely ruled out, long-term inflation expectations remain stable, indicating that such an extreme scenario remains unlikely for now. Yellen’s views on Fed rate cut expectations align to some extent with those of Wall Street giant Goldman Sachs. Goldman Sachs economists recently concluded that this round of price shocks resembles mild stagflation rather than a repeat of the 2022 inflation spiral, and they maintain expectations for 25-basis-point rate cuts in September and December. The core views of Yellen and Goldman Sachs are consistent in their monetary policy outlook: neither has shifted to a "no rate cuts this year" or "certain rate hikes" stance due to the oil price shock. Despite the oil price shock, Yellen still believes the Fed may cut rates this year. "My guess is that there might be a rate cut later this year. I think that’s entirely possible—it’s the main scenario. But, you know, many things could happen," the former U.S. Treasury Secretary said. Minutes from the Fed’s March 17–18 policy meeting, released last Wednesday in Washington, showed that a growing number of Fed officials are concerned that high oil prices resulting from the Iran conflict could spread to every corner of U.S. society, pushing inflation onto a rising trajectory. These hawkish-leaning officials explicitly stated that the Fed may have to consider raising rates. The median interest rate projection from Fed policymakers released after that meeting suggested one rate cut in 2026, unchanged from their December dot plot. At the March meeting, Fed policymakers kept the benchmark rate in the 3.5% to 3.75% range, with most officials indicating that at least one rate cut this year would be appropriate. Yellen again expressed concerns about the Fed’s policy independence, warning that former President Trump’s threatening calls for lower rates undermine U.S. credibility and that of the U.S. Treasury and dollar system. "For a president of a developed country—and our currency is the dominant global reserve currency—to publicly suggest that interest rates should be set to reduce federal debt servicing costs? When you hear things like that, it’s what you’d typically hear in a banana republic," Yellen remarked. Regarding Trump’s nominee for incoming Fed Chair Kevin Warsh, with whom Yellen served at the Fed for six years, she suggested that given his reputation as an "inflation hawk," he might clash with Trump’s monetary policy stance. She noted that Warsh’s strong belief in the productivity-boosting potential of the AI wave may help explain his willingness to take the Fed chair role. Traders have largely unwound bets on Fed rate cuts this year. At the start of the year, futures markets priced in about two rate cuts. Earlier this week, traditionally dovish Chicago Fed President Austan Goolsbee stated that if the Iran conflict leads to persistently high oil prices, slowing inflation’s return to the Fed’s 2% target, the Fed might not cut rates until 2027. Goolsbee said during the Semafor World Economy Meeting, "I previously thought there could be multiple cuts in 2026; but if this situation persists and we don’t see inflation decline, with inflation staying high, realistically, that would push the timeline beyond 2026. Our job is to bring inflation back to 2%." "If the oil price shock from Middle East geopolitical conflicts is resolved and inflation resumes its decline, making it appear we are returning to the 2% target, then rate cuts will be back on the table." Goldman Sachs: A Repeat of 2022-Style Global Inflation Unlikely Yellen’s latest views indirectly support Goldman Sachs’ judgment that the oil price shock is not enough to completely close the window for rate cuts this year. Although the Strait of Hormuz remains effectively blockaded by Iranian forces, posing a new energy-driven supply shock to the U.S. economy, growing market confidence in a long-term peace deal between the U.S. and Iran leads Goldman to characterize the macro impact as mild stagflation rather than a comprehensive shock like the 2022 Russia-Ukraine war combined with ultra-loose global policies, which reshaped inflation trajectories. A key element of Goldman’s macro framework is that high oil prices will not trigger significant capital expenditure expansion in the U.S. shale industry as in traditional cycles. Under this framework, Goldman raised inflation forecasts, lowered GDP and employment expectations, and maintained its call for two rate cuts this year (September and December). Goldman believes that U.S. oil and gas producers, having learned from past cycles, have strengthened capital discipline and are more cautious about geopolitically driven price spikes, rather than rapidly expanding production. This implies that, in Goldman’s view, the net effect of the energy shock on the U.S. economy will be a greater drag on consumption, without sufficient growth offset from energy investment. In other words, the U.S. economy faces a "negative purchasing power shock" rather than "reinvestment expansion from an energy boom," so downward pressure on growth will outweigh industrial compensation. Precisely because Goldman defines this shock as mild stagflation—"growth damage greater than inflation reacceleration"—rather than "2022-style runaway reflation," it maintains its forecast for 25-basis-point Fed rate cuts in September and December. The underlying policy logic is that a slight rise in unemployment, modest core inflation decline, and fading year-over-year tariff effects still provide room for cuts; while energy price increases pose upside pressure, they are not enough to force the Fed into panic-driven rate hikes. Of course, Goldman acknowledges that if some FOMC members then view inflation stickiness as still high, combined with uncertainty from leadership changes, the rate cut pace could face debate. However, its core conclusion remains unchanged: this is not a repeat of the 2022 inflation nightmare but a controllable yet not-to-be-underestimated stagflation disturbance.