The tape is built on a contradiction. The Federal Reserve, under new Chair Kevin Warsh, leaned hawkish on Wednesday precisely as oil prices unwind, which was the trigger for the additional hawkishness.
Warsh Redraws the Map
In his first meeting as Chair, Warsh held the federal funds rate steady but reshaped almost everything around it. The Fed clearly committed to "delivering price stability", abandoned the forward guidance that had telegraphed the rate path for more than a decade, and published a dot plot in which half the committee now expects a hike this year. Forward guidance is simply the central bank's habit of signalling where rates are likely to head; removing it raises uncertainty, which markets generally dislike. That hits long-duration growth stocks hardest, which is why the megacap and semiconductor names led Wednesday's slide as the S&P 500 and Nasdaq retreated.
The Truce That Undercuts the Hawk
The irony is that the very pressure Warsh is guarding against is fading. Washington and Tehran signed an interim agreement to end their conflict and reopen the Strait of Hormuz, with a formal ceremony due Friday. Crude has responded by dropping back to the $75 area, where prices are slightly elevated, but the economy is no longer headed for a standstill. That said, a reopening on paper is not the same as oil flowing freely as shippers and insurers remain cautious, and full normalisation of traffic through the strait could take months. Just as it took a couple of months for the surge in inflation to show up, it will now take a couple of months for it to disappear from the data again.
The Picture Into Friday
Gold has been thrown around by the same tension, sold off on the hawkish dot plot before recovering as the peace deal firmed up. The tricky part is that two forces are pulling rate expectations apart, a Federal Reserve braced for inflation, and a truce that should make that inflation go away. Which one wins depends on how quickly oil actually flows again at pre-conflict rates.