Reopened Strait of Hormuz and falling oil prices may recast Fed's options for future cuts

• Oil prices plunged from around $95 to below $89 per barrel after Iran announced it would reopen the Strait of Hormuz for the duration of a ceasefire with the U.S. and following an Israel-Lebanon ceasefire
• Market expectations for Fed rate cuts shifted dramatically, with traders now pricing in possible cuts by late 2025 instead of 2027
• San Francisco Fed President Mary Daly indicated that if the conflict is resolved soon, it would delay but not derail inflation progress toward the Fed's 2% target

Summary

Key Development: Iran announced the reopening of the Strait of Hormuz following a ceasefire with the U.S., causing oil prices to plunge below $90 per barrel for the first time in over five weeks. Prices dropped from approximately $95 to below $89 per barrel.

Market Implications: The reopening and falling oil prices have significantly shifted Federal Reserve rate cut expectations. Market traders now anticipate potential rate cuts as soon as December 2025, a dramatic change from previous expectations that the Fed would remain on hold until well into 2027.

Fed's Position: The Federal Reserve faces a complex outlook ahead of its April 28-29 policy meeting. Officials must assess:

• The extent of inflationary damage from the seven-week Middle East conflict
• Whether the ceasefire will hold permanently
• If inflation will sustainably return to the Fed's 2% target (currently about one percentage point above target)

Official Commentary: San Francisco Fed President Mary Daly indicated in a recent interview that if the conflict is resolved soon, it would delay but not derail inflation progress. She suggested the resolution would simply extend the timeline for achieving inflation targets rather than stalling progress entirely.

Context: The developments follow a ceasefire announcement between Israel and Lebanon, with Iran agreeing to reopen the crucial shipping strait for the duration of its ceasefire with the United States.

Bottom Line: Easing geopolitical tensions and declining energy prices are providing the Fed greater flexibility on monetary policy, potentially enabling earlier rate cuts than previously anticipated, though officials remain cautious about underlying inflation trends.