Today's news out of the Mideast and Washington regarding progress towards peace and reopening of the Strait of Hormuz caused oil prices to plummet below $90 per barrel, as financial markets rallied. The 10-year Treasury dropped to 4.24% after hitting 4.33% yesterday. Heightened oil prices and fears of a long-term supply shock have been stoking inflation expectations, dampening consumer sentiment, and delaying Fed rate cut expectations.
The reopening of the strait may ease pressure on the Fed, as the energy price spike exacerbated the "sticky" inflation of recent months. The softening labor market may require attention. Comments today from Fed Gov Waller: "High inflation and a weak labor market would be very complicated. I'll have to balance the risks to the two sides of the Fed's dual mandate. That may mean maintaining the policy rate at the current target range if the risks to inflation outweigh those to the labor market." Futures markets are now at 50/50 for one cut by year end (up from 30% yesterday).
Speaking of the Fed, the upcoming meeting (April 29) will most certainly be Powell's final meeting as Fed Chair. Fed Chair Nominee Kevin Warsh's path to confirmation is complicated by the pending investigation of Fed Chair Powell. That could cause delays in the Senate confirmation process. That (ironically) could result in Powell remaining as Fed Chair beyond his term, awaiting the Warsh confirmation. Also, Powell has indicated he may choose to remain on the Fed Board upon his replacement as Chair (meaning he would remain as a voting member for up to two more years, with Warsh as Chair; this would be highly unusual). The White House has threatened to fire Powell if he follows through on that, which would set up a Supreme Court showdown. Stay tuned…
