The market is betting on a rate hike again? Bank of America pours cold water: soaring oil prices may force the Fed to adopt a dovish stance.

The Bank of America pointed out that investors who are betting on the Federal Reserve adopting a hawkish policy due to rising oil prices may be making a mistake. The bank further warned that actual supply shocks could instead prompt the Fed to maintain interest rates stable, or even trigger a significant rate cut in extreme circumstances to cushion the economic impact. Despite the fact that since the outbreak of the Iran war, the yields on two-year US Treasury bonds have been rising in tandem with soaring oil prices, reflecting the market's hawkish expectations for the Fed to possibly raise borrowing costs, American economist Adia Bavay warned that such expectations "may be mistaken." He emphasized that the transmission mechanism of energy supply shocks on monetary policy is not linear. When skyrocketing oil prices simultaneously boost inflation expectations and suppress economic growth momentum, the Fed needs to balance between its dual mandate of "price stability" and "full employment"this dual pressure may weaken the necessity of hawkish rate hikes. As he detailed in his report on Tuesday: "Energy shocks will significantly 'thicken' the tail risks of policy distribution: it may extend the time window for maintaining interest rates unchanged, while also increasing the probability of rate hikes and extreme scenarios of significant rate cuts." Since the beginning of this month, short-term bond yields have risen by approximately 20 basis points. Pricing by market traders shows that the expected extent of Fed rate cuts this year has narrowed from over 60 basis points before the conflict broke out to about 40 basis points. On Tuesday, international oil prices experienced a significant retreat after surpassing $100 per barrel, but the trend of reduced oil production in the Middle East is still intensifyingglobal oil supply has decreased by about 6%, and shipping through the strategic Strait of Hormuz, a key global energy transport chokepoint, is almost at a standstill, indicating that supply-side risks have not fundamentally eased. Bavay pointed out in the report that the current market reaction is similar to the period of escalated Russia-Ukraine conflict in 2022back then, the US unemployment rate was low, and consumers still had ample fiscal stimulus funds to support spending. However, the current situation in the US is characterized by a weak labor market, moderate inflation, and relatively mild fiscal support. He emphasized: "If the oil supply shock continues to ferment, this will significantly increase the possibility of the Fed adopting a dovish policy."