Iran oil shock has put Fed rate cuts off the table and hikes back on, Pimco says

Pimco’s CIO warned the Financial Times (gated) that the Iran war’s energy shock could make Fed rate cuts counter-productive and may even necessitate hikes, with Franklin Templeton echoing the concern.Summary:Pimco chief investment officer Dan Ivascyn told the Financial Times at the Milken Institute conference in Beverly Hills that rate cuts by the Federal Reserve would be counter-productive given the inflation dynamics created by the Iran war’s impact on energy prices, and said hikes could not be ruled out for the United StatesFranklin Templeton chief executive Jenny Johnson, in a separate interview at the same conference, said inflation would be harder to control and that it would be difficult for the Fed to cut rates, adding that investor appetite for inflation-protected assets was risingThe Fed’s preferred inflation measure, the personal consumption expenditures index, registered 3.5% in March, its highest level in almost three years, amid energy price pressures stemming from the Hormuz disruptionThe Fed held rates steady for a third consecutive meeting last month in a decision that featured the highest number of internal dissents since 1992, though it retained language suggesting the next move could still be a cutThe two-year Treasury yield has risen around 0.5 percentage points since the war began in late February to 3.87%, reflecting a significant repricing of the Fed rate pathKevin Warsh, Trump’s nominee to replace outgoing Fed chair Jay Powell whose term ends on May 15, is expected to be confirmed by the Republican-controlled Senate; both Pimco and Franklin Templeton expressed confidence he would maintain sufficient independence on rate-setting and balance sheet management—The intervention from two of the world’s largest fixed income and asset managers carries significant weight for markets, as it frames the Iran-driven energy price surge not merely as a supply shock but as a structural inflation problem that central banks may need to actively tighten against. A Fed rate hike scenario, even if still a tail risk, would strengthen the dollar and historically weigh on commodity prices including crude, creating a countervailing force to the geopolitical risk premium currently supporting oil. The jump in the two-year Treasury yield of around 50 basis points since the war began is already tightening financial conditions in a way that could dampen demand. With the Fed’s preferred inflation gauge running at 3.5% in March, its highest in nearly three years, the energy channel from Hormuz to Main Street is now firmly part of the monetary policy calculus, adding a further layer of complexity to crude’s price outlook beyond the purely supply-side disruption story.
This article was written by Eamonn Sheridan at investinglive.com.

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