A Deal With Iran Will Not Push The Fed To Cut Policy Rates

Reports that a U.S.-Iran agreement to reopen the Strait of Hormuz is moving closer have triggered a familiar reflex: lower oil prices, a weaker dollar, and a bid for risk assets. The simple read is that lower energy costs ease inflation, giving the Federal Reserve room to cut rates. That chain of logic is too clean. The better market read requires tracing the actual transmission path through rates, yields, and policy expectations.

The Oil-to-Rates Link Is Broken

The immediate impact on crude oil is the most direct. A reopened Strait of Hormuz would add supply to a market already wrestling with demand uncertainty. Lower oil prices feed into headline inflation prints, which the market interprets as a dovish signal. The Fed has been clear that it is watching core services inflation, not headline energy swings. A one-off drop in gasoline prices does not change the trajectory of shelter costs or wage growth. The April PCE print already confirmed that demand-driven inflation is the real constraint on the rate path. A supply-side oil shock in reverse does not alter that calculus.

The Dollar and Yield Reaction

The 10-year Treasury yield initially fell on the news as traders priced in a lower inflation premium. That move is logical but fragile. If the oil price drop is temporary or coincides with stronger economic data, yields will snap back. The dollar weakened on the same logic. The dollar's fate is tied more to relative rate differentials than to oil alone. The European Central Bank and the Bank of Japan face their own inflation dynamics. A weaker dollar helps emerging markets and commodities. It does not automatically translate into a Fed cut. Gold rallied on the weaker dollar and lower real yields. That is a positioning-driven rally. If the Fed holds rates steady, real yields will stabilize and gold will give back some of those gains.

The Equity Risk Appetite Trap

Equity indices, particularly the S&P 500 and Nasdaq, initially rose on the headline. Lower oil is a net positive for consumer discretionary stocks and for airlines. The broader index rally assumes that lower oil leads to higher earnings via lower input costs and stronger consumer spending. That assumption ignores the fact that the Fed's policy stance is determined by the core PCE trajectory, not by energy prices. If the Fed does not cut, the valuation premium on growth stocks becomes harder to justify. The market is pricing in a rate cut by September. That pricing depends on a continued decline in core inflation. A U.S.-Iran deal does not guarantee that.

The Next Data Point That Matters

The next scheduled data point that matters is the May CPI print. If core inflation remains sticky, the oil-driven rally in risk assets will reverse. The real test for the transmission mechanism is whether lower oil feeds into lower core services inflation. That takes months to show up in the data. For traders watching the gold profile or the crude oil profile, the key level is whether the 10-year yield can hold below its recent range. If yields rise back above that level, the dollar will strengthen and gold will stall. The Bessent Signals Iran Sanctions Relief Could Be Gradual article makes the point that any deal will be phased. The oil supply impact will be gradual. That supports the view that the market is front-running a policy shift the Fed has not yet endorsed. Traders should wait for confirmation from the inflation prints before committing to a sustained risk-on position.