Kevin Hassett, a Senior Adviser for the White House, spoke to Fox Business on Tuesday about energy prices and interest rates.
He said the White House expects energy prices to fall quickly once the Strait of Hormuz is reopened.
He also said the outlook for the Federal Reserve having room to cut interest rates is expected to be very solid.
We see a very solid outlook for the Federal Reserve having room to cut rates if energy prices fall. With WTI crude recently trading over $95 a barrel, energy has been a key driver of the recent 3.8% inflation reading. This situation is holding the Fed back from the easing cycle many anticipate.
Considering this, we are watching for any sign of de-escalation in key shipping lanes like the Strait of Hormuz. A sudden resolution could cause a rapid reduction in energy prices, mirroring the pattern we observed in late 2025. Traders might consider buying put options on crude oil futures to position for such a sharp downturn.
A sharp decline in oil would directly impact inflation expectations, potentially giving the Fed the green light to begin cutting rates sooner than the market currently projects. This makes call options on interest rate futures, such as those tied to SOFR, an attractive strategy. These positions would gain value as the market reprices the probability of a mid-year rate cut from the current 5.50% level.
We recall a similar situation in the third quarter of 2025 when a sudden drop in oil prices led to a significant rally in Treasury futures. Back then, the market rapidly shifted its expectations for Fed policy within weeks. That period serves as a valuable playbook for how quickly sentiment can turn on a single catalyst.
