Markets caught between oil and interest rates

19 June 2026 | 10:23 AM 

Markets caught between oil and interest rates

After more than 100 days of conflict between the US and Iran, with markets largely focused on the impact of oil prices on inflation and growth, we believe two key macro developments over the past week are likely to shape the global economic backdrop over the coming months.

First, the US-Iran deal. The US and Iran have signed a Memorandum of Understanding that establishes a 60-day framework for negotiations towards a broader peace agreement. Most importantly, all military activity across all fronts will cease during this period, while commercial shipping will be allowed to move freely through the Strait of Hormuz. Negotiations will focus on Iran’s nuclear programme, the easing of economic sanctions, the unfreezing of Iranian assets, and Iran’s access to a proposed US$300 billion economic rehabilitation programme.

Both parties have strong incentives to reach a workable agreement. Iran would be able to reintegrate into the global economy, strengthening the legitimacy of the current regime, while the US and President Trump would benefit from lower oil prices and improved economic conditions. While markets have welcomed these developments, several risks remain, including disagreements around nuclear negotiations, political dynamics following the US midterm elections, and the potential for renewed tensions involving Israel and Lebanon. For now, however, lower oil prices (in the US$75–85 range) should improve the inflation outlook and reduce the extent of future interest rate hikes by central banks. This would support economic activity, improve growth prospects and underpin global trade.

The second major development was the FOMC meeting, which marked Kevin Warsh’s first meeting as Chair of the Federal Reserve and provided an early indication of how he intends to reshape both monetary policy communication and the institution itself. Inheriting a highly divided Fed, Warsh delivered the shortest post-meeting statement on record, removed traditional forward guidance and chose not to publish his own policy-rate projections.

While the decision to leave interest rates unchanged was unanimous (12-0), the Committee’s internal outlook revealed a more nuanced picture, with officials split 9-9 on the need for an additional rate hike in 2026. Markets interpreted the overall message as hawkish, with the US dollar strengthening, Treasury yields moving higher and global risk assets coming under modest pressure.

Beyond the rate decision itself, the most important development may have been Warsh’s announcement of five review committees focused on the Federal Reserve’s balance sheet strategy, communications framework, productivity analysis, economic data and forecasting tools, and the inflation-targeting framework. These initiatives suggest a Chair intent on reassessing many of the assumptions and operating practices that have guided the Fed over the past decade.

The hawkish tone is notable given the recent decline in energy prices and easing concerns around commodity-driven inflation. The FOMC appears to be placing greater weight on the resilience of the US economy, supported by solid growth, a stable labour market, strong capital investment and improving productivity trends. The message from this first meeting is clear: the Fed remains focused on price stability and is prepared to maintain restrictive policy settings if economic momentum continues to exceed expectations.

Markets are currently pricing in a Fed rate hike in October. The South African Reserve Bank is also likely to be cautious in signalling a less restrictive policy path if US economic data remains firm and the Fed retains a hawkish bias.

At present, markets are caught between two opposing forces: the economic support provided by lower oil prices and the potential tightening of financial conditions that could result from additional Fed rate hikes. We expect some volatility as investors assess these competing influences. However, we believe the hurdle for further US rate increases remains high, as there is growing evidence that US household consumption may begin to soften over the coming months.

22 APRIL 2026 | 10:38 AM 

New Fed Chair incoming: What Warsh means for markets

The US Federal Reserve sets US Monetary Policy, and as the global economic superpower, it has a direct impact on markets and economies globally. Current Fed Chair Jerome Powell’s term is about to expire on 15 May. Kevin Warsh has been nominated by the Trump Administration as the new Fed Chair. His confirmation hearing took place yesterday, and markets focused keenly on his views on monetary policy and how it may impact future policy setting. Here are the key takeaways for us:

• Inflation: Believes the Fed has lost some credibility, and his priority will be to restore it. He also indicated that the current Fed overrelies on lagging inflation indicators.
• Fed balance sheet: Sees it as too big and will push to shrink meaningfully. He noted that a smaller balance sheet may reduce inflationary pressures and unlock lower rates for the economy.
• Fed independence: Committed to Fed Independence, but added that the Fed needs to earn and maintain it.
• Fed communication: Prefers less frequent communication and forward guidance as it will allow for more flexibility and more proactive policy setting.
• Impact of Iran war: The war is a short-term supply shock; the Fed must remain vigilant and not fall behind the curve.

Overall market implications: A Warsh-led Fed may be more disciplined and proactive, but will likely be less interventionist and supportive with less forward guidance. This may require a slightly higher risk premium as it could lead to increased market volatility.

The effective start date of Kevin Warsh’s term may be delayed, as one Republican Senator, Thom Tillis, indicated that he would vote against any Fed nominees until the Department of Justice probe into Chair Powell is over. The Republicans hold a narrow majority on the Committee. In that case, Powell will likely continue as Fed Chair for a short period. Fed Chair Powell’s last official meeting will be on 29 April, with Kevin Warsh taking over from 17 June 2026.

Author

Jacobus Lacock

Multi-Asset Portfolio Manager & Macro Strategist

Jacobus joined Fairtree in 2011 and is a Multi-Asset Portfolio Manager & Macro Strategist as well as a Fixed Income Portfolio Manager in the Investment team. Prior to joining Fairtree, he spent five years at Goldman Sachs Asset Management in London, where he served as UK Head of Fixed Income and Currency Product Management. 

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