Written before today's Federal Reserve meeting - Can interest rate hikes lower oil prices?

The Federal Reserve meeting is at 2 AM on Thursday, and the vast majority of friends believe that an interest rate hike is inevitable. Although I am still one of the few who think that an increase may not happen, it doesn't matter, after all, I am losing confidence myself.

But I know that if the Federal Reserve truly does not engage in expectation management, then it should not raise interest rates. If it does raise rates, it must be expectation management, as the core PCE data has not shown an upward trend so far. Although we all know that it is highly likely to rise next month, that is an issue for next month.

My current view is that the Federal Reserve will raise interest rates in this meeting, but we all know that the main reason for the current month-on-month inflation rise is the increase in oil prices, and the rise in oil prices is due to Iran blocking Hormuz and Trump's incompetence. So, can the Federal Reserve's interest rate hike lower oil prices?

In the long term, it is indeed possible to lower prices on the supply side by reducing demand, no problem, but this is long-term, possibly a quite extended period, or a situation that may only occur if the US is dragged into economic recession.

If the Federal Reserve's decision is more hawkish than the market expects, the dollar may strengthen, and the market may revise down its expectations for future economic growth and oil demand. Long positions in crude oil may decrease, and the financing costs of holding inventory may increase, all of which could put pressure on oil prices. At this time, even if there is no significant decrease in the actual consumption of crude oil today, futures prices may fall first.

However, if the Federal Reserve only raises rates by 25 basis points and is more cautious about future policies, it may not put much additional pressure on oil prices. For example, we see that the current price difference in WTI futures is due to the market's expectation of the reaction after the Federal Reserve's interest rate hike.

More importantly, interest rate hikes cannot directly restore transportation in Hormuz, nor can they repair the damaged pipelines in Saudi Arabia. Even if interest rate hikes lower the futures price of oil, as long as Hormuz remains unresolved, crude oil still cannot be exported, which may push prices up again due to supply pressure.

Therefore, the Federal Reserve must face the reality that if oil prices continue to rise and inflation pressures continue to expand, it may need to maintain high interest rates for a longer period or even raise rates again.

This is also why I still have doubts about this interest rate hike. I acknowledge that interest rate hikes can influence oil prices and understand that the Federal Reserve needs to guard against inflation spread, but interest rate hikes cannot resolve Trump's incompetence and the global tolerance towards Iran. If this round of conflict cannot be resolved, the combined costs of high oil prices and high interest rates will ultimately fall on businesses and ordinary families.

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