US-Iran deal sends oil below $85, easing pressure on Fed rate path

The US and Iran reached a deal to reopen the Strait of Hormuz, sending Brent crude down 3.8% to $84.02 a barrel and prompting markets to price out a near-certain December rate hike from the Federal Reserve.

"The decline in oil prices is relieving pressure on Fed Chairman Warsh to raise rates, with the two-year Treasury yield falling as markets strip out previously priced-in tightening," said Leslie Falconio, a strategist at UBS Group.

Brent crude, which traded near $70 before the conflict began in late February and peaked at about $120 during the war, extended its slide after Pakistani Prime Minister Shehbaz Sharif announced the accord. West Texas Intermediate fell 4.1% to $81.40. The two-year Treasury yield declined as overnight-index-swap markets unwound expectations that had priced a near-100% probability of a rate increase by December 2026.

The deal removes a key source of inflationary pressure that had pushed average US gasoline prices to $4.56 a gallon in May, complicating the Fed's policy path. With the strait handling about 20% of global oil and liquefied natural gas flows, its reopening could further depress energy costs and reduce the urgency for monetary tightening ahead of November's midterm elections.

President Donald Trump confirmed the agreement on social media Sunday, his 80th birthday, writing "oil will flow" and authorizing the removal of the US naval blockade. Iran's Deputy Foreign Minister Kazem Gharibabadi said the memorandum of understanding will be published after an official signing ceremony scheduled for June 19 in Switzerland, with Pakistan mediating the talks.

The broad contours of the deal include an end to competing blockades of the waterway, a mutual non-aggression commitment, and the start of negotiations on Iran's nuclear program. Iran would receive relief from sanctions targeting its overseas oil sales, though the specific financial incentives remain unclear. A senior US official said Iran would earn economic rewards tied to meeting a set of US demands, while Tehran has also sought access to billions of dollars in frozen overseas accounts.

The last time a comparable geopolitical shock disrupted global energy markets — Iraq's invasion of Kuwait in 1990 — oil prices doubled within three months and the Fed held rates steady through the subsequent recession. The current situation mirrors that dynamic in reverse: the removal of a supply-side shock is easing both inflation and tightening expectations simultaneously.

For the broader economy, the implications extend beyond energy markets. US gasoline prices have already retreated to an average of $4.07 a gallon from their May peak, and further declines would provide a direct boost to consumer purchasing power. That dynamic is particularly significant for the political outlook, with polling showing the war deeply unpopular among Americans ahead of midterm elections in November.

Still, the disrupted market will take months to fully untangle. It remains unclear how quickly ship owners and operators will regain confidence to transit the waterway, and Persian Gulf oil producers that cut production when the main export route was severed will need time to revive output. Israel's position also remains uncertain after Prime Minister Benjamin Netanyahu's government jeopardized the signing with new attacks on Lebanon.

This article is for informational purposes only and does not constitute investment advice.