Iran Closes Strait of Hormuz Again: Are Fed Rate Hikes Back on the Table?

• The Strait of Hormuz, through which roughly 20% of global oil supply passes, has been closed again by Iran after hostilities resumed almost immediately following last week's memorandum of understanding
• Betting markets now price a 62% probability of Fed rate hikes in 2026, surging from 28% within days of the truce signing, as oil price increases threaten to reignite inflation
• Oil producers expect no supply normalization before late 2026 or 2027, shifting market expectations from potential rate cuts to a 'higher-for-longer' interest rate environment

Market Summary: Iran Closes Strait of Hormuz, Raising Fed Rate Hike Concerns

Key Developments

Iran has closed the Strait of Hormuz again, collapsing a brief U.S.-Iran truce signed via memorandum of understanding (MOU) last week. The waterway, through which roughly 20% of global oil supply passes, was reopened following the ceasefire agreement but has now been shut down as hostilities resumed almost immediately.

Market Impact

Oil prices are rising as traders reassess supply disruption risks, threatening to reignite inflation pressures across the economy. Energy costs affect virtually every sector, from gasoline and diesel to manufacturing and consumer goods.

Major market indices showed modest declines:

• S&P 500: -0.22%
• Dow Jones: -0.32%
• Nasdaq 100: -0.23%
• Russell 2000: -0.09%

Federal Reserve Implications

The renewed crisis dramatically alters the Federal Reserve's policy outlook. Betting markets now price in a 62% probability of a 2026 rate hike, surging from just 28% immediately after the MOU signing. Market conversation has shifted from anticipating rate cuts to considering potential tightening.

Oil producers expect supply normalization won't occur until late 2026 or 2027, pushing rate-cut expectations further back and cementing a "higher-for-longer" interest rate environment.

Investment Outlook

The brief hope for cooling inflation and earlier Fed rate cuts has evaporated. With energy prices climbing again, policymakers face difficult choices between tolerating persistent inflation or maintaining aggressive monetary policy. Investors should prepare for extended elevated interest rates and potentially additional Fed tightening, marking a significant shift from expectations just days earlier.