UBS: Oil Prices Fall After Ceasefire, Easing Pressure on Fed Rate Hikes

"Probability of Rate Hike Drops to 74%"
'Easing Bias' Expected to Be Removed at June FOMC
No Rate Hike Expected This Year

Following the ceasefire agreement between the United States and Iran and the reopening of the Strait of Hormuz for 60 days, there are reports that market bets on a Federal Reserve (Fed) rate hike this year are weakening.

According to Bloomberg News on the 15th (local time), UBS AG assessed that the recent decline in oil prices and a rally in the Treasury market have led the market to partially reverse its expectations for a Fed rate hike this year.

Federal Reserve System. Reuters Yonhap News

Leslie Falconio, Head of Taxable Fixed Income Strategy at UBS Global Wealth Management, stated, "As recently as last week, the market fully priced in a 0.25 percentage point rate hike by December, but today that probability has dropped to about 74%. As oil prices decline, the market is partially reversing its outlook for rate hikes," she explained.

In fact, the yield on the two-year U.S. Treasury note, often used to gauge the direction of benchmark rates, has turned downward in tandem with falling oil prices. This suggests that concerns over inflation, which had intensified due to surging energy prices after the war, are easing and the need for aggressive action by the Fed is also diminishing.

Fed Chair Kevin Warsh has recently faced pressure to raise rates as inflation concerns resurfaced in recent U.S. economic indicators. There have also been public calls within the Fed for additional tightening this year.

UBS expects that at the upcoming FOMC meeting, the Fed will strengthen its hawkish signal not by raising rates, but by removing the 'easing bias' from its statement. However, UBS forecasts that the Fed’s next policy move will not be a rate hike, but a rate cut, projecting that the timing for a cut will be in 2027.

Falconio, Head of Strategy at UBS, said, "The Fed will remain on hold for the time being and monitor the data. Once sufficient economic indicators have accumulated, the policy shift will likely come in the first or second quarter of 2027."

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