Rising US inflation and higher energy prices are complicating the outlook for early US interest rate cuts under incoming Fed Chair Kevin Warsh. Markets are reassessing Fed policy risks, which is supporting the US Dollar.
Central banks are currently treating the energy price shock as temporary. Risks rise if the Strait of Hormuz stays closed, which could keep energy prices elevated or push them higher.
Inflation And Energy Shock
If US inflation continues to increase, or if inflation expectations rise, the Federal Open Market Committee may lean towards tighter policy. Some FOMC members have already raised concerns about inflation pressures.
If inflation stays high for longer, it becomes harder to deliver rate cuts. The Strait of Hormuz is described as the main factor shaping the near-term path for inflation and policy.
The note says this assessment follows yesterday’s inflation data. The article states it was produced with an AI tool and checked by an editor.
We must reassess the Federal Reserve’s path for the coming weeks, as the market’s hope for rate cuts is fading. The inflationary pressures we saw building in late 2025 have not subsided, directly challenging new Fed Chair Kevin Warsh’s ability to pursue easing. This situation means the hawkish stance from the central bank is likely to continue for longer than we initially anticipated.
Market Pricing And Dollar Strength
The latest April 2026 CPI data confirms this, showing a year-over-year increase of 3.8%, well above the Fed’s target and higher than forecasts. This is largely fueled by energy costs, with WTI crude futures for June delivery holding steady around $95 a barrel amid the unresolved closure of the Strait of Hormuz. These hard numbers give hawkish FOMC members a strong case against lowering rates anytime soon.
For interest rate derivatives, this suggests positioning for a ‘higher for longer’ reality. The probability of a rate cut by the July FOMC meeting, as priced by Fed Funds futures, has now collapsed to below 20%, a dramatic shift from the 60% chance we saw priced in late last year. Strategies that benefit from stable or rising short-term rates, and higher volatility, should be considered.
This policy divergence is providing significant support for the US Dollar. The US Dollar Index (DXY) has climbed to a new 12-month high, touching 107.50, as other central banks appear more inclined to cut rates. We should consider long-dollar positions, particularly against currencies whose economies are more sensitive to high energy prices.
This situation is reminiscent of the Fed’s response to the energy shock of 2022, when it prioritized crushing inflation with aggressive hikes despite growing recession fears. That historical precedent from just a few years ago suggests the central bank will not risk its credibility by cutting rates prematurely. This makes Warsh’s task of engineering a dovish pivot extremely difficult in the current environment.
