WTI Crude Oil Falling Below $90 Fails to Change Sticky Inflation, Rate Hike Probability Still Reaches 60%. Why Is the Market Still Betting on a Fed Rate Hike?

Tradingkey - Since the outbreak of the conflict in Iran, international crude oil prices have risen rapidly. Over recent months, U.S. economic data has consistently shown that inflationary pressures triggered by rising oil prices are spreading across the entire industrial chain. Against this backdrop, the market has traded ahead of expectations for a Federal Reserve rate hike, pushing U.S. Treasury yields higher to reach new periodic highs.

However, the latest geopolitical situation has taken a major turn, with hopes rising for a peaceful resolution to the U.S.-Iran conflict. Consequently, WTI crude oil futures fell below the $90 per barrel psychological level today for the first time since May 7. This shift has introduced uncertainty into the previously "set in stone" rate hike expectations held by the market.

Separately, Kevin Warsh, the 17th Chair of the Federal Reserve, is set to chair his first Federal Open Market Committee (FOMC) meeting on June 16-17. The market is looking to this meeting to observe his policy stance and decision-making framework. Analysts generally believe that Warsh takes office amid the Fed's most complex policy environment in recent years: on one hand, the Middle East conflict has driven up international oil prices, and energy inflation has spread throughout the industrial chain, with the April U.S. CPI rising to 3.8% year-on-year, showing significantly stronger-than-expected resilience. On the other hand, U.S. economic growth momentum has shown signs of marginal slowdown, while President Trump continues to pressure the Fed to initiate a rate-cutting cycle as soon as possible.

BlackRock's latest research report also presents a view contrary to the market mainstream—under the leadership of new Fed Chair Warsh, the Federal Reserve already possesses sufficient policy space and decision-making grounds to favor a rate-cut path, rather than the further hikes previously widely expected by the market.

Navin Saigal, Head of Global Fixed Income for Asia Pacific at BlackRock, analyzed that while the U.S. economy currently shows better-than-expected resilience, this performance is largely driven by a massive investment boom in artificial intelligence. He also issued a critical warning: the core logic of this round of AI capital expenditure is the systematic replacement of human labor with machines and software, which will place structural pressure on the U.S. labor market in the future.

Saigal further pointed out that the market is currently in a dual-phase struggle between the ongoing release of AI investment dividends and geopolitical inflationary pressures that have not yet fully subsided. Whether the U.S. economy will continue its strong growth or turn toward recession over the coming year remains highly uncertain.

Against this backdrop, the most prudent and stable policy choice for the Federal Reserve is to maintain current interest rates, adopting a neutral "wait-and-see" stance. If a clear choice must be made between hiking or cutting rates, current economic data—coupled with potential concerns in the labor market—is sufficient to support a shift toward a rate cut, or at least maintaining rates where they are.

While BlackRock's assessment regarding a Fed policy pivot has some logical support, market expectations for a rate hike this year have not seen a significant downward revision following the sharp drop in oil prices driven by the U.S.-Iran peace agreement.

According to the latest "FedWatch" data from the Chicago Mercantile Exchange (CME), the probability of a Fed rate hike in 2026 remains as high as 59.94%, down only about 10 percentage points from the 70% level before the U.S.-Iran draft peace agreement was reached. Meanwhile, the market-priced probability of a rate cut this year remains at 0%.

This indicates that while the temporary easing of Middle East geopolitical risks has indeed dampened overheated inflation expectations, market expectations for a shift in Federal Reserve monetary policy have seen almost no substantive change. The "higher for longer" interest rate narrative continues to dominate.

The reason is that the decline in oil prices resulting from the U.S.-Iran peace agreement is still insufficient to reverse the inflationary trend for the coming months. Recent economic reports have clearly confirmed that the inflationary pressures triggered by previous oil price increases have fully spread across multiple sectors, forming sticky structural inflation. This impact is irreversible and will not change inflation readings simply due to a short-term drop in oil prices.

In other words, the short-term decline in oil prices has a limited impact on the Fed's "data-dependent" decision-making framework. In this context, the Federal Reserve still lacks sufficient grounds to initiate a rate-cut cycle prematurely and will likely "stand pat" during the next several FOMC meetings.