The Fed Raises Interest Rates... While Oil Defies Inflation
Global markets are facing a dual test: US monetary tightening to combat inflation, and a series of shocks in the energy market that threaten to keep oil prices at elevated levels. This scenario presents investors with a more complex equation: the Federal Reserve seeks to curb inflation through interest rates, while supply disruptions push energy prices in the opposite direction. The Fed is set to raise interest rates by 25 basis points to a range of 3.75%–4%, the first increase since 2023, amid fears that a spike in energy prices could reignite inflationary pressures. Yields on 10-year US Treasury bonds had surpassed 5%, reflecting tighter financial conditions and higher risk premiums. However, the Fed’s battle is not being fought in a vacuum; oil itself has become one of the key drivers of inflationary pressure. Although Brent crude fell to around $107.82 per barrel due to a sudden rise in US inventories, prices remain above the $100 mark, with geopolitical concerns remaining potent.
**Hormuz: The Supply Chokepoint**
The situation is becoming increasingly sensitive as navigation traffic in the Strait of Hormuz continues to decline to extremely low levels. Preliminary data showed that the number of transits dropped to single digits on some days, compared to a much higher average before the escalation. Concurrently, the Saudi East-West pipeline was hit by attacks that disrupted operations, a route that provides the Kingdom with the capacity to export crude away from the Strait of Hormuz. These developments raised concerns about the ability of supplies to reach markets, before Saudi Arabia began providing additional shipments via the Sultanate of Oman to mitigate the impact of the disruption.
Supply disruptions have not been confined to the Gulf. Protests in Libya led to the closure of valves and a reduction in operations at several fields, with the National Oil Corporation warning that a force majeure declaration could follow if closures persist. Thus, the oil market is moving on two opposing axes: rising US inventories are pressuring prices, while disruptions in Hormuz, the Saudi pipeline, and Libyan production are providing upward support.
**Gulf Stock Markets: High Oil Is Not Enough**
Uncertainty has spilled over into Gulf stock markets, with most exchanges in the region closing lower on Tuesday under pressure from geopolitical tensions and reduced navigation through Hormuz. The Saudi index fell 0.9%, Dubai 0.8%, and Qatar 0.5%, while Abu Dhabi moved in the opposite direction. In Kuwait, the market closed with a slight decline; the general market index dropped 3.95 points, or 0.04%, to 8,942.04 points, despite the main market index rising 33.63 points (0.35%), with trading volume reaching approximately 144.2 million dinars.
The performance of Gulf markets reveals an important paradox: while rising oil prices usually provide financial and economic support to exporting nations, increases driven by supply disruptions and war simultaneously raise risk premiums and dampen investor appetite.
**Gold Moves Counter to Stocks**
In the metals market, gold rose by about 1% to $4,334 per ounce, reflecting the hedging sentiment prevailing in markets ahead of the Fed’s decision, while US futures rose to around $4,373. Gold is moving in a highly complex environment; higher interest rates increase the opportunity cost of holding a non-yielding asset, but escalating geopolitical tensions and inflation risks support demand for it as a hedge.
The current landscape places the global economy in a difficult equation: high oil prices raise energy costs, higher interest rates combat inflation, rising bond yields pressure stock valuations, and geopolitical tensions increase risk premiums. Consequently, markets are not viewing the Fed’s decision merely as a quarter-point hike, but are primarily anticipating its signals regarding next steps, especially if oil prices remain above $100 and supply disruptions persist.
While investors are betting on the ability of monetary policy to contain inflation, the harder question remains: To what extent can the Fed curb inflation fueled by energy shocks, shipping route disruptions, and wars? In this equation, stocks, gold, and oil are not moving in independent directions; they have all become parts of a single story titled: Interest rates try to curb inflation, while oil reignites it.
**Fuel Prices and Borrowing Costs**
Diesel prices in the US reached a record high of $6.27 per gallon, while gasoline prices rose by 18 cents per gallon over the past week to reach $4.33.
**Interest Rates for Borrowers**
Banks are likely to raise interest rates on credit cards and other lending products, although a single 0.25 percentage point increase may not lead to a significant rise in borrowing costs. Conversely, raising interest rates may help limit the rise in long-term interest rates that consumers pay on products such as mortgages. This is because mortgage rates tend to track yields on 10-year US Treasury bonds, which have risen sharply in recent weeks as investors question the Fed’s commitment to reducing inflation. When inflation is high, investors typically demand higher yields for holding long-term bonds.
**Interest Rates for Savers**
Although rising interest rates increase borrowing costs, they also mean higher returns for savers.
**Interest Rates for Investors**
The Fed’s moves on interest rates can cause volatility in financial markets. For example, when the Fed began raising interest rates at an accelerated pace in 2022, as the economy recovered from the pandemic’s aftermath, the S&P 500 index fell by about 18%.
**Bitcoin Below $76,000**
Bitcoin continued its losses from the previous night’s trading, falling after the US Senate rejected a major regulatory bill for cryptocurrencies. Caution increased ahead of the Federal Reserve meeting, adding pressure to the market. Cryptocurrency prices remained under pressure following the Senate’s decision, amid fears of escalating geopolitical tensions in the Middle East and rising yields on US Treasury bonds. Bitcoin fell 1.8% to $75,893.10.
