The US-Iran agreement to halt the 15-week-long war and reopen the Strait of Hormuz has eased fears of a lasting inflation spike, reducing the urgency for the Federal Reserve to consider a rate hike in the immediate future.

Impact on the Federal Reserve

The agreement has taken some pressure off Kevin Warsh, the potential next Federal Reserve chairman, as the job market has also shown signs of improvement this spring. Energy prices are plunging, and the US-Iran agreement has reduced the risk of a spike in inflation.

According to Benson Durham, a former Fed official and founder of DASM LLC, an independent research firm, the agreement means the worst-case scenario for rate hikes is more off the table than on it. Krishna Guha, vice chairman and head of economics and central bank strategy at Evercore ISI, also noted that the lower path for oil means a smaller inflation wave than feared, with less extended supply chain disruptions and reduced risk of a spike to new highs that would shock inflation expectations.

Expert Insights

Eric Rosengren, former president of the Federal Reserve Bank of Boston, told CNN that the US-Iran framework is clearly positive news, but cautioned that the formal signing of the agreement is not scheduled until Friday, after the Fed meets. He also noted that the market is not signaling a swift return to pre-war prices, with the futures market not seeing Brent returning to $75 a barrel until 2028.

Despite the challenges still facing the economy, the US-Iran agreement has allowed Fed officials to avoid overreacting to another hot inflation report in June, with the agreement boosting the wait-and-see approach advocated by doves at the Fed, who are generally more willing to keep rates lower.

Original reporting: KTVZ (Central Oregon) — read the source article.