The Federal Reserve shows hawkish signals, oil prices don't fall, and stock market pressure persists

AI Question: Why High Oil Prices Intensify Downward Pressure on the Stock Market?

By | Chen Jerry

Jerry Chen

Edited by | Wu Haishao

The Federal Reserve on Thursday kept its policy rate unchanged at 3.5%—3.75%, in line with market expectations, but its forecast for the future path of interest rates is clearly more hawkish.

Amid persistently rising oil price pressures, expectations for the Fed’s first rate cut this year have been pushed back to September, and global stock markets are under heavy pressure as well.

This image may have been generated by AI

Rate-Cut Expectations for the Fed Pushed Back

In its Economic Outlook, the Federal Reserve raised its inflation and GDP growth forecasts for the current and next two years, while keeping its unemployment rate forecast unchanged. What is even more striking is the dot plot, which shows that the committee still maintains expectations for one rate cut each in 2026 and 2027, but judging from the distribution, it is no longer as dovish as it was in December last year.

Although the Economic Outlook is relatively neutral, Powell still released some relatively hawkish signals at the press conference, saying he would not consider rate cuts until he sees improvement in inflation.

At the same time, the interest-rate market believes that rate cuts will not occur until after July next year; the rate path is even more hawkish than a month ago (see Figure 1).

The Fed released its quarterly economic projections, and the biggest change is that there is no progress in its 2% inflation target. The median of the FOMC members’ projections indicates that the PCE inflation rate is now expected to be 2.7% this year (2.4% in the forecast from December), and that PCE for 2027 will be slightly raised to 2.2% (from 2.1%).

The Fed also slightly increased its forecast for real GDP growth to 2.4%, while keeping its unemployment rate projection unchanged at 4.4% this year, and raising it slightly from 4.2% to 4.3% next year.

As for the much-watched “dot plot” interest-rate forecast, even the most dovish member has returned to the consensus: the forecast dot near 2% from last December has disappeared, while the dots that had been hovering around 2.5%—2.75% have moved up to around 3%—3.125% (each dot represents a voting committee member’s view of interest rates). The overall stance is that the range of the rate forecast has narrowed, suggesting the committee has leaned toward a more gradual, smaller-magnitude rate-cut path.

After the interest-rate decision was released, the two-year Treasury yield—more sensitive to rates—surged sharply to 3.78%, the highest level in seven months, lifting the U.S. dollar index (DXY) back above the 100 level. On the surface, the shift in rate policy has strengthened the dollar, but the real driving forces are the situation in the Middle East and the inflation risks and risk-aversion sentiment it brings.

Since the changes in the Middle East situation, safe-haven funds have clearly been more inclined toward crude oil and the U.S. dollar, while gold has fallen back from its highs and broken below the 50-day moving average. Both technical trends and the news backdrop suggest that the near-term outlook may be bearish.

Watch for oversold rebound intraday, but initial resistance is in the 4890—4900 zone. Next possible resistance is around 4970, the lower end of the prior consolidation range. The downtrend line since March around 5040 is also continuing to act as a key resistance level. Before the market digests the Fed’s decision, taking short positions on the rebound is worth paying attention to. As shown in the chart (see Figure 2), on the downside, if gold breaks below the trend line from August, it could test 4650 and then 4500.

Oil Prices Remain High and Hard to Get Down

Since the U.S. launched military strikes against Iran, the logic in financial markets has gradually become clear: safe-haven funds flow into crude oil and the U.S. dollar. Inflation risks have forced global central banks to end easing policies and even move into a rate-hiking cycle, which in turn weighs on gold and triggers sell-offs in global stock markets.

Because everything traces back to crude oil, whether and when crude oil will pull back is the key to where the market goes next.

As events have expanded, multiple oil and gas facilities in Gulf countries have been hit by airstrikes, forcing many countries to cut production significantly. Because rebuilding infrastructure will take longer, the market is more concerned about this than even a blockade of the Strait of Hormuz.

The chart below (see Figure 3) shows that the Middle East crude oil benchmark and the premium versus markets in Europe and the U.S. are about 50 dollars. The former is the spot price sold to Asian countries, which can more realistically reflect current supply-and-demand conditions in the crude oil market and allows a reasonable inference that Asian countries will be hit first by the economic shock. The latter is the pricing framework of the Atlantic Basin. When the International Energy Agency (IEA) releases strategic crude oil reserves, it provides a temporary buffer for Europe and the U.S., which is why prices hover around 100 dollars.

But short-term strategic crude oil inventory can’t deal with a long-lasting supply disruption. Once inventories in Europe and the U.S. are running low, WTI and Brent crude prices could see a catch-up rally. From this perspective, energy supply risk—perhaps even an energy crisis—may be more severe than people imagine. What can truly bring oil prices back to calm is only the easing of the Middle East situation.

Global Stock Markets Under Pressure

For stock markets, especially the U.S. stock market, judging from the drawdown of more than the past two weeks, it appears that the risk of a global energy crisis has not been fully priced in yet. After all, the U.S. is a net energy exporter, which can dilute part of the impact, but a strong dollar and high inflation are still too heavy to bear for equities.

About 1/4 of global seaborne crude oil trade passes through the Strait of Hormuz. Institutional calculations show that after deducting the portion that can be diverted to the Red Sea or the Gulf of Oman, the effective crude oil supply affected may exceed 10 million barrels per day.

It is worth noting that prior to the geopolitical conflict in the Middle East, global crude oil supply fundamentals were already in an oversupply scenario. The forecast oversupply volume for 2026 exceeds 3.17 million barrels per day, the highest level in recent years. However, the conflict has led to the reduction of at least 6.7 million barrels per day of capacity. Whether the energy market will shift from oversupply to tightness will depend on the duration and intensity of the conflict.

Although the U.S. is a net crude oil exporter, the surge in oil prices clearly hits inflation. Asian countries, being mostly crude oil importers, face even more challenging circumstances. Even though China, Russia, and IEA member countries hold certain strategic reserves, releasing those reserves can only smooth short-term volatility in the spot market; it cannot fundamentally eliminate the war premium.

From a micro perspective, rising energy prices increase companies’ costs, compressing profits; and delaying rate cuts will keep borrowing costs high. For consumers, that means lower disposable income and reduced willingness to spend, which in turn drags down corporate revenues. From a macro perspective, a strong dollar could hit overseas revenues for companies. For S&P 500 constituent stocks, 30%—40% of revenues come from overseas markets, and for technology companies, overseas revenue accounts for as much as over 50%.

Since the 1980s, whenever oil prices hit historical or phase highs, the S&P 500 has fallen into bear markets (see Figure 4).

Taking the Nasdaq index as an example (see Figure 5), although the index has kept pulling back for the past three weeks, among global stock markets it is still relatively mild in terms of its decline. AI panic has not yet temporarily combined with energy supply risk.

From the perspective of a longer cycle, the index has been in a high-range consolidation phase over the past six months. On the 4-hour timeframe, it has also formed a narrower consolidation range. The lower end of the range at 24,300 points and 24,000 points naturally become key support and could form a stop-the-fall-and-rebound走势. In the short term, watch the pressure in the trendline area around 24,800—24,900 points.

(This article was published in the March 21 issue of Securities Market Weekly. The author is a senior analyst at G.S. Group. The article only represents the author’s personal views and does not represent the stance of this publication.)