White House National Economic Council Director Kevin Hassett said a deal between the U.S. and Iran to reopen the Strait of Hormuz could lower energy prices.

Such a move is critical because energy costs directly drive global inflation. If oil prices drop due to stabilized shipping lanes in the Persian Gulf, the Federal Reserve may have the necessary economic room to reduce interest rates.

Speaking on May 24, 2024, Hassett said an agreement to reopen the strait could trigger a drop in energy prices sufficient to ease inflation and pave the way for the Fed to cut rates [1]. The Strait of Hormuz remains one of the most volatile chokepoints for global oil transit, and any disruption typically spikes fuel costs worldwide.

Market indicators suggest investors are already anticipating a diplomatic breakthrough. On May 6, 2024, interbank deposit rates (DIs) closed with losses exceeding 20 basis points across several maturities [2]. This downward movement in rates often reflects a market belief that future inflation will be lower than previously expected.

These financial shifts follow reports that the U.S. and Iran are nearing a memorandum to end the conflict in the Gulf [3]. While the White House has not finalized the terms, the potential for a memorandum of understanding suggests a shift toward stabilization in the region.

Reducing the risk premium on crude oil would lower the cost of goods and services across the U.S. economy. This cooling effect on prices is the primary prerequisite for the Federal Reserve to pivot away from its current restrictive monetary policy.

“An agreement between United States and Iran to reopen the Strait of Hormuz can provoke a drop in energy prices.”

The link between geopolitical stability in the Persian Gulf and US monetary policy is direct. Because energy is an input for almost every sector of the economy, a diplomatic resolution to the Strait of Hormuz crisis would act as a deflationary force. This would allow the Federal Reserve to lower borrowing costs without risking a resurgence of inflation, potentially stimulating economic growth through cheaper credit.