Oil Price Retreats as Non-Inflation "Antidote": AI Investment and Domestic Demand Overheating Put the Fed in a Dilemma, Market Expects Two Interest Rate Hikes This Year

BlockBeats News, June 26th. Following the U.S.-Iran ceasefire and the resumption of traffic through the Strait of Hormuz, oil prices quickly plummeted. While this may seem to alleviate inflationary pressures on the surface, the market's bet on the Fed's rate hikes has hardly loosened. This rare divergence is sparking deep discussions on Wall Street.

Reuters columnist Mike Dolan pointed out the core contradiction: even before the Iran conflict erupted, signs of overheating in the U.S. economy were already evident. From January to February this year, core inflation was already more than 1 percentage point above the Fed's 2% target. The fall in oil prices not only cannot eliminate inflation stickiness but may instead release consumer and investment demand previously suppressed by high oil prices, further raising price pressures. This situation puts the Fed in a double bind of "rising oil prices driving inflation and falling oil prices stimulating overheating."

Apollo Global Management's Chief Economist, Strock, stated that the traditional positive correlation between oil prices and the 2-year U.S. Treasury yield has broken down. The market's mainstream view has shifted to "the resumption of the Strait of Hormuz will further exacerbate U.S. economic overheating." The May PCE released on Thursday rose to 3.4% year-on-year, remaining above the policy target; both the June composite PMI readings also exceeded expectations, with upward pricing pressure from businesses still at elevated levels. Meanwhile, the AI capital expenditure boom continues to drive the stock market bull run, expanding household wealth, forming a self-reinforcing cycle of inflation.

JPMorgan Chase's mid-year outlook clearly states that the Fed's next move is highly likely to be a rate hike, but the timing may be delayed until 2027, creating a discrepancy with the futures market pricing in two rate hikes this year. The bank's strategy team warned that the probability of an economy in a "Goldilocks"-like scenario of low inflation and moderate growth continues to decline, raising the necessity of targeted rate hikes.

Furthermore, the policy communication reform spearheaded by Fed Chair Powell—substantially reducing forward guidance—further complicates market trading. Morgan Stanley believes this will significantly increase the market's sensitivity to economic data, causing the center of gravity for short-term fixed-income asset volatility to continually shift upward, leading to increased macro trading uncertainty.