Oil prices fall, non inflationary 'antidote': AI investment and overheated domestic demand put the Federal Reserve in a dilemma, market maintains bet on two rate hikes within the year According to BlockBeats, on June 26th, after the ceasefire between the United States and Iran and the resumption of operations in the Strait of Hormuz, oil prices quickly fell, seemingly easing inflationary pressures on the surface. However, the market's bet on the Federal Reserve raising interest rates has hardly loosened - this rare divergence is triggering deep discussions on Wall Street. Reuters columnist Mike Dolan pointed out that the core contradiction lies in the fact that even before the outbreak of the Iran conflict, the US economy had shown signs of overheating, with core inflation exceeding the Federal Reserve's 2% target by over 1 percentage point in January and February of this year. The decline in oil prices not only fails to eradicate inflationary stickiness, but may also release consumption and investment demand previously suppressed by high oil prices, further pushing up price pressure and putting the Federal Reserve in a dual dilemma of "rising oil prices driving inflation, and falling oil prices stimulating overheating". Apollo Global Management Chief Economist Slock bluntly stated that the traditional positive linkage between oil prices and 2-year US Treasury yields has become ineffective, and the mainstream market judgment has shifted to 'the resumption of flights in the Strait of Hormuz will further exacerbate the overheating of the US economy'. The PCE for May, announced on Thursday, rose to 3.4% year-on-year, consistently exceeding the policy target; The comprehensive PMI in June also exceeded expectations, and the pressure of enterprise price increases remains high. At the same time, the AI capital expenditure boom has driven the stock market to continue its bull run and the wealth of residents to expand, forming a self reinforcing cycle of inflation. JPMorgan Chase has made it clear in its mid year outlook that the next round of Fed operations is likely to be a rate hike, but the timing may be postponed to 2027, which differs from the pricing of the two rounds of rate hikes in the futures market this year. The strategy team of the bank warns that the probability of a "blonde girl style" low inflation and moderate growth scenario in the economy continues to decrease, and the necessity of selective interest rate hikes continues to rise. In addition, the policy communication reform implemented by Federal Reserve Chairman Walsh, which significantly reduces forward guidance, further increases the difficulty of market trading. Morgan Stanley predicts that this will significantly increase the sensitivity of the market to economic data, with the central volatility of short-term fixed income assets continuing to rise and macro trading uncertainty increasing instead of decreasing. [Original link]