U.S. and Iran to Resume Talks on Tuesday to Salvage Ceasefire Deal, Kashkari Reaffirms Rate Hike Outlook

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Summary:

The United States and Iran have agreed to halt airstrikes and will meet in Doha on Tuesday in an effort to salvage their fragile ceasefire agreement; Kashkari expects one interest rate hike in 2026...

Highlights

1. The U.S. and Iran agree to halt airstrikes and will meet in Doha on Tuesday to rescue their fragile ceasefire agreement.

2. Iran will assume full control of the Strait of Hormuz for the next 30 days, delaying its full reopening to external intervention.

3. The U.S., Israel, and Lebanon reach a trilateral framework agreement.

4. Kashkari expects one interest rate hike in 2026.

5. Kent: The cash rate remains the preferred policy tool, while tolerance for low inflation may decline.

Details

U.S. and Iran Agree to Halt Airstrikes, Set Tuesday Meeting in Doha to Rescue Ceasefire Deal

Senior U.S. officials said the United States and Iran have agreed to cease mutual attacks and plan to meet in Doha on Tuesday to resolve disputes over the Strait of Hormuz, in an effort to reinforce a ceasefire agreement that began to unravel just 11 days after taking effect. Commercial vessels will be allowed to navigate freely during the technical negotiations.

Both sides resumed attacks in recent days, placing the ceasefire under severe strain. The dispute stems from differing interpretations of the Strait-related provisions in the memorandum of understanding. Under the agreement, Iran pledged to ensure the safe passage of commercial vessels through the Strait, while the United States agreed to lift its blockade of Iranian ports.

During talks in Switzerland last week, both sides agreed to establish a direct communication hotline between the U.S. military and Iran's Islamic Revolutionary Guard Corps. However, as of Saturday, the hotline had yet to become operational, and Iran once again insisted that vessels must coordinate their passage through the Strait.

The meeting originally scheduled to take place in Switzerland has been moved to Doha due to escalating tensions, with the Strait of Hormuz once again becoming the central focus of discussions. Nick Stewart, head of the U.S. technical negotiating team, is expected to attend. The White House has not yet commented.

Iran to Exercise Full Control Over the Strait of Hormuz for the Next 30 Days

During a visit to Iraq, Iranian Foreign Minister Abbas Araghchi said Iran will assume full control over the Strait of Hormuz for the next 30 days. He added that he had briefed Iraq's foreign minister on the latest developments in the conflict and the progress of the U.S.-Iran memorandum of understanding.

Araghchi said Iran will fully supervise and manage the Strait during this period and will restore its full navigational capacity once all obstacles have been removed, describing this as Iran's primary objective.

He stressed that this responsibility rests solely with Iran, as clearly stipulated in the memorandum of understanding. Any external interference or unilateral action, he warned, would worsen tensions and delay the Strait's full reopening.

U.S., Israel, and Lebanon Reach Trilateral Framework Agreement

The United States, Israel, and Lebanon concluded four days of negotiations in Washington by announcing a trilateral framework agreement.

The U.S. State Department released a 14-point framework that includes strengthening the Lebanese government's sovereignty across the country, the gradual withdrawal of Israeli forces from Lebanese territory, and the prior disarmament of Hezbollah. Israel and Lebanon also agreed to establish two pilot zones before gradually expanding the arrangement with mutual consent.

According to Israeli media, the two pilot zones will be located in southern Lebanon, where Israeli forces will withdraw and transfer control to the Lebanese Armed Forces.

In a televised address, Israeli Prime Minister Benjamin Netanyahu said the agreement allows Israeli forces to retain control over most of the security zone in southern Lebanon. He stressed that Israeli troops would remain there as long as security threats persist and until Hezbollah is disarmed.

Lebanese President Joseph Aoun described the framework agreement as the first step toward restoring Lebanon's sovereignty and enabling displaced citizens to return home.

Kashkari Reaffirms Expectation of One Rate Hike in 2026

Minneapolis Fed President Neel Kashkari said in a speech last Friday that increasingly broad-based inflationary pressures led him to project one interest rate hike in 2026 in the Federal Reserve's latest economic projections released earlier this month. He also expects interest rates to remain unchanged in 2027.

Speaking in a media interview, Kashkari said his concerns about inflation extend beyond the Middle East conflict, reflecting broader inflationary pressures across the economy. The Iran conflict has driven oil prices higher, while prices in many other categories have also increased.

These developments have reinforced concerns among some Federal Reserve officials that inflation has become more widespread and persistent, potentially requiring a stronger policy response.

Earlier this week, a report showed that the annual PCE inflation rate rose to 4.1% in May, the largest increase since April 2023. Inflation has remained above the Fed's 2% target for more than five years. In the Fed's latest dot plot, half of the policymakers who submitted projections expected at least one rate hike this year.

Kent: Cash Rate Remains the Preferred Policy Tool

Reserve Bank of Australia Assistant Governor Christopher Kent said in a speech on Monday that, following a review of alternative monetary policy tools, the central bank will be better equipped to respond to future risks.

He emphasized that the cash rate target remains the primary and preferred policy instrument. Other tools can provide support during extraordinary circumstances but are more complex and carry greater risks.

Kent added that when interest rates are already at low levels, the Board may become less tolerant of inflation falling below the 2%–3% target range. In such circumstances, the central bank may consider lowering the cash rate target earlier and more decisively to counter disinflationary shocks.

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