Leslie Falconio, Head of Taxable Fixed Income Strategy at UBS Global Wealth Management, said that the drop in oil prices following the agreement announced between the US and Iran has reduced the pressure on the Fed to raise interest rates this year.
According to Falconio, the decline in oil prices has led to a strengthening in the US Treasury bond market. This development has also caused expectations of a December interest rate hike, which the markets had almost fully priced in beforehand, to gradually recede.
Falconio noted that even before the ceasefire agreement, oil prices had begun to fall, yet the yield on two-year US Treasury bonds had risen. He explained that this was because markets had priced in a nearly 100% probability of a rate hike in December. Falconio stated, “Now oil prices are falling, and the market is withdrawing its expectations of a rate hike. Therefore, the yield on two-year Treasury bonds is also starting to fall.”
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Newly appointed Fed Chairman Kevin Warsh will preside over his first interest rate decision this week. With sharp increases in oil prices reigniting inflationary pressures, voices within the FOMC favoring rate hikes this year are reportedly gaining strength.
Falconio said he expects the Fed to formally remove its supportive policy stance at this week’s meeting, thus shifting its policy outlook to a more hawkish one. However, the UBS strategist believes the Fed’s next move will likely be a rate cut, not a rate hike, probably in 2027.
*This is not investment advice.
