Bank of America Securities strategists, led by Aditya Bhave among others, say that the ongoing rise in oil prices since late February - following the outbreak of conflict in Iran - has placed crude within what they describe as a "hawkish" zone for the Federal Reserve.
At 10:04 ET (14:04 GMT) on Wednesday, U.S. West Texas Intermediate (WTI) crude had fallen 4.1% to $88.57 per barrel, while the Brent futures contract for May delivery, the global benchmark, slipped 4.1% to $100.23 per barrel. The strategists point out that WTI was trading near $65 per barrel before the start of the Iran-related disruption.
How the price band matters
In their note, the BofA team set out a threshold range in which they see U.S. monetary policy risks shifting higher. Specifically, they state that rate hikes by the Fed become "most plausible" if WTI averages between $80 and $100 per barrel over the course of the year. The bank frames this as a scenario under which the central bank would grow more concerned about inflationary pressures and therefore adopt a comparatively hawkish posture.
Energy costs have been pushed up in large measure by the effective closure of the Strait of Hormuz, a key shipping channel south of Iran that accounts for about one-fifth of global oil flows. That disruption has already been reflected in a rise in U.S. gasoline pump prices and is likely to feed into broader price statistics in coming months, the strategists note.
Survey evidence is beginning to show the impact of higher input costs on businesses. A recent S&P Global business activity survey cited by the analysts indicated a growing number of American firms confronting a jump in input costs, a development that could add to inflationary momentum.
Range of policy outcomes
"[T]here is a range of outcomes - where the [oil] shock is sustained but moderate - such that the Fed would turn hawkish because it’s more worried about inflation," the Bank of America analysts wrote.
At the same time, the strategists emphasize that multiple scenarios remain viable. If the oil shock proves temporary but large, they argue, an initial surge in inflation might quickly fade as consumers scale back spending in response to higher prices, tempering demand.
They further explain that if elevated energy costs trigger a sustained selloff in equity markets, the resulting negative wealth effects could deepen downside risks to employment. Employment is the second leg of the Fed's dual mandate, and rising labor-market weakness in that scenario would push the central bank toward a more dovish stance.
In short, BofA frames the current episode as one in which a moderate, persistent energy-price shock raises the probability of Fed tightening, while a temporary spike followed by demand destruction and equity weakness could flip the policy calculus in the opposite direction.
Key takeaways
- Bank of America strategists see WTI averaging $80-$100 per barrel this year as a trigger that would make Fed rate hikes more plausible.
- The effective closure of the Strait of Hormuz has been a major factor behind the recent rise in energy prices and higher U.S. gasoline costs.
- Business surveys are signaling rising input-cost pressures that could feed into inflation readings.