Oil You Need Is Love (And Lower Energy Prices): Fed's Daly Lays Out Two Scenarios for Rate Cuts

The US-Iran conflict is sending oil prices to the moon, and suddenly inflation is back at the dinner table uninvited. Rate hikes? Still very much on the menu. Looks like the Fed isn't done playing Mario Kart with interest rates, hitting every banana peel on the track.

In the March FOMC minutes, the Fed basically said it's pricing in both cuts and hikes—because why commit when you can stay flexible? It's like having a crypto wallet that can go to the moon or straight to zero depending on which way the wind blows. No commitment, no problem.

San Francisco Fed President Mary Daly spoke to Reuters and dropped some truth bombs. She expects high inflation to stick around and wouldn't be shocked if March numbers stayed elevated. Turns out, the US had an inflation problem before the oil shocks even entered the chat. Spoiler alert: this wasn't the plot twist anyone was hoping for.

Now? Fighting inflation is priority numero uno, but it's going to take longer than expected. Think of the Fed like that degen who promises to "soon" repay their margin loan—it's definitely happening, just maybe not as soon as you thought.

Daly's take: the Iran oil situation has pushed the Fed's 2% inflation target further into the future. Basically, the Fed is in full wait-and-see mode on rates. Diamond hands energy, but for monetary policy.

But here's the plot twist—if the Iran conflict resolves quickly and oil prices drop, rate cuts aren't off the table. Sometimes the market gets those sweet airdrops when you least expect it.

Daly also put the odds of a rate hike as lower than the odds of cuts or holding steady. She outlined two clear scenarios: basically, the Fed is giving us the ultimate "choose your own adventure" book, except all endings involve either pain or slightly less pain.

Scenario One: Iran war resolves fast, ceasefire holds, oil prices dip. Energy costs fall for businesses and consumers. Inflation starts trending down again. Rate cuts stay on the table. This is the bullish case—imagine if the Fed suddenly becomes your favorite DeFi yield farm again.

Scenario Two: Supply disruptions linger even after the shooting stops. Inflation stays higher for longer than the Fed expected. In that case, the Fed waits until it's absolutely certain before making any moves. This is the bear case where you might be waiting for the rate cut equivalent of waiting for Bitcoin to hit $1 million—technically possible, patience required.

So there you have it—two paths, zero guarantees. The market just needs to HODL and see which scenario actually plays out. At this point