Gold Holds Near $4,240 as Hormuz Attack Clouds Fed Rate Path

Q: Could a prolonged closure in the Strait of Hormuz force the Federal Reserve to completely abandon its rate-cut plans this year?

Yes—if the Strait of Hormuz were shut for long enough and pushed oil and shipping costs sharply higher, it could cause the Federal Reserve to drop this year’s rate-cut plans. But “completely abandon” is more likely than an immediate move to rate hikes. The key issue is duration. Hormuz carries roughly a fifth to a quarter of global seaborne oil trade and a large share of LNG. Analysts and Fed-linked research say a short disruption would mainly create volatility and a temporary energy spike, something central banks often try to look through. A prolonged closure is different because it would raise freight, insurance and input costs, spread beyond gasoline into core prices such as airfares, goods transport and food, and risk lifting inflation expectations. That is why recent market commentary has shifted from debating cuts to debating whether the Fed must stay on hold—or even turn more hawkish. Boston Fed research suggests the current oil shock is meaningful enough to lift headline PCE inflation materially, even if the U.S. is less vulnerable to oil shocks than in the 1970s because of higher domestic production and lower energy intensity. Still, a sustained closure would not automatically force hikes. The Fed would also weigh weaker growth and softer labor data. If the shock looked temporary, policymakers could pause and wait. If it persisted for months and second-round inflation broadened, rate cuts this year would become very hard to justify and could be shelved entirely.

3 articles · Updated · Bloomberg · Aug 7

Bullion traded in a narrow range around $4,240 an ounce after closing the previous session down 0.2%, as traders weighed whether fresh Middle East tensions could alter the Federal Reserve’s rate outlook.
Iranian media reported Tehran struck “hostile targets” in the Strait of Hormuz and would seek to block US and Israeli vessels from the key shipping lane.
The flare-up came after Tehran had said a pact with Oman to open shipping lanes was in its final stages, underscoring how quickly conditions in the waterway have shifted.