The new week on the oil market started with a sharp rally. Brent rose more than 2% to above $111 per barrel, while WTI climbed nearly 3% to around $114.

The move is largely driven by tensions around the Strait of Hormuz, a critical route for global oil shipments. Restrictions on vessel movement have increased fears of supply disruptions.

Pressure intensified after tougher rhetoric from the United States toward Iran, warning that failure to restore normal shipping could trigger strikes on key infrastructure.

Even though exports have not fully stopped, the market is already pricing in a geopolitical risk premium, reflecting uncertainty around logistics, insurance costs, and potential escalation.

In his Harvard speech, Jerome Powell clearly outlined the Fed’s stance on the current oil shock caused by the war in Iran.

Rising energy prices on their own are not a reason to hike rates, as long as long-term inflation expectations remain anchored. Powell described the current fed funds rate level (3.5%–3.75%) as “a good place to pause.”

The purpose of the pause is to separate the temporary supply shock from more persistent trends in inflation and employment. Monetary policy works with long lags, and the oil shock may pass before rate hikes begin to cool demand — potentially hurting growth and the labor market without addressing the root cause.

Markets reacted immediately: the probability of a rate hike by December dropped sharply from over 50% to just 2.2%.

Powell also noted that the 5-year breakeven inflation rate remains stable (around 2.56%) and has even edged lower, suggesting investors do not yet anticipate a sustained inflation surge.

On private credit (a ~$3 trillion market), he acknowledged rising defaults and investor outflows but stated there are currently no visible channels that could quickly transmit stress to the banking system.