As market participants brace for the Federal Reserve’s June policy meeting, a new geopolitical development is reshaping rate hike expectations. UBS Global Wealth Management stated that the recently announced Iran-U.S. agreement has eased pressure on the Fed to raise interest rates this year, thanks to a sharp drop in oil prices.
Leslie Falconio, Head of Taxable Fixed Income Strategy at UBS, noted that the decline in oil has already strengthened the U.S. Treasury bond market. The two-year Treasury yield, which had risen on a nearly fully priced-in December rate hike, is now falling as markets dial back those expectations. Falconio explained, “Now oil prices are falling, and the market is withdrawing its expectations of a rate hike. Therefore, the yield on two-year Treasury bonds is also starting to fall.”
The shift comes just ahead of the FOMC meeting on June 17, where newly appointed Chair Kevin Warsh will preside. While no immediate rate change is anticipated (a 99.4% probability of a hold, per CME FedWatch), the focus is on the Fed’s forward guidance. A CNBC survey shows 88% of economists expect the committee to abandon its easing bias, signaling a more hawkish stance despite growing calls from President Trump for cuts. Meanwhile, a Bank of America fund manager survey found that 40% of investors now expect at least one rate hike in the next 12 months, up sharply from 16% a month ago.
Falconio believes the Fed’s next move may ultimately be a rate cut, likely not until 2027. The combination of falling oil and waning rate hike bets offers a potential positive backdrop for risk assets, including cryptocurrencies, as tighter monetary policy fears subside.
