National Economic Council Director Kevin Hassett tied a possible deal with Iran to a major shift in Federal Reserve policy. He suggested that such an agreement could lower fuel prices and set the stage for interest rate cuts. Speaking on May 24, Hassett said once the deal is done,energy prices would “plummet,” giving the Fed a chance to cut rates under new chair Kevin Warsh.
Hassett's outlook comes as the oil market faces chaos. U.S . and Israeli strikes on Iran have disrupted oil supplies. The Strait of Hormuz,a key route for global oil transport, has been largely closed for almost three months. Gasoline prices have shot up to $4.55 per gallon, the highest for this time of year since 2022, according to AAA.
Yet, despite Hassett's rosy predictions,the economic landscape is tough. Inflation was already above the Fed's 2% target before strikes,fueled by the post-pandemic recovery and energy shocks from the Ukraine conflict. The Consumer Price Index (CPI) hit 3.8% in April,exceeding expectations, while wholesale inflation rose 6.0% over the past year,the biggest jump since December 2022 .
Hassett believes reopening the Strait could unleash a wave of oil from reserves in Saudi Arabia and the United Arab Emirates. But analysts warn that any significant price drop is uncertain. For gasoline to fall below $3 a gallon, Brent crude needs to dip below $70 a barrel,which futures market doesn’t foresee until 2032. Current estimates from JPMorgan Chase predict Brent will average around $97 a barrel through the end of 2026,even if the strait reopens soon.
Hassett's claims fit into a larger strategy by the administration to keep a positive spin on affordability as November midterms near. However, the Fed's current path contradicts Hassett's assertions . Many officials and analysts expect the federal funds rate to hold steady for now, with some predicting possible hikes by December.
The complexities of the Iran deal add to the uncertainty. President Donald Trump said on May 23 that negotiations were “largely completed,” but the deal is still not finalized. Iran insists that any agreement won’t restore the strait to its former operational state. Tehran is looking for sanctions relief and war reparations,complicating matters further.
For investors,Hassett's narrative carries weight. If oil prices drop, it could mean lower inflation and interest rates,benefiting rate-sensitive stocks. Still, current market conditions suggest a cautious approach, with expectations for only one rate cut by September and persistently high oil prices. This scenario may favor sectors like energy and defense over tech stocks, which are more exposed to rising rates.
In the end,while Hassett's forecasts offer a sliver of hope for economic relief,the market realities and the Fed's current stance paint a more complicated picture. The optimism around the Iran deal may not bring immediate benefits for consumers or investors.
