U.S.-Iran Deal Nears Completion as the Fed Internally Shifts Toward Rate Hike Discussions

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Summary:

The U.S.-Iran agreement text has entered the final polishing stage; more Federal Reserve policymakers are becoming open to interest rate hikes...

Highlights

1. The U.S.-Iran agreement text has entered its final polishing stage and could be announced within hours

2. Fed minutes show more policymakers are open to interest rate hikes

3. Timiraos: Rate-cut discussions are nearly over as the Fed begins seriously considering hikes

4. Iran says it will continue negotiations despite having “strong distrust” toward the United States

5. A June ECB rate hike is now largely certain, though uncertainty remains for July

6. U.S. crude oil inventories posted a record 17.8 million-barrel plunge last week as exports hit a record high

Details

The U.S.-Iran agreement text has entered its final polishing stage and could be announced within hours

According to Al Arabiya, sources said all parties are working intensively on the final revisions to the agreement text between Washington and Tehran.

Pakistan’s Army Chief may visit Iran tomorrow to announce that the final version of the agreement text has been completed. If the visit does not take place, the finalized agreement could still be announced within hours. The next round of negotiations is expected to be held in Islamabad after the Hajj season.

Fed minutes show more policymakers are open to interest rate hikes

Last month, concerns among Federal Reserve officials intensified over inflationary pressures stemming from the Iran war, leading a growing number of policymakers to accept the possibility that interest rate hikes may become necessary. This suggests incoming Fed Chair Kevin Warsh will inherit an increasingly hawkish central bank team.

Minutes released Wednesday showed that most Fed policymakers believed that some additional tightening measures could become appropriate if inflation remains persistently above the central bank’s 2% target.

In response to that possibility, many participants said they preferred removing language from the post-meeting statement that implied future policy decisions might lean toward easing. In the Fed’s terminology, the word “many” does not necessarily indicate a majority, but it suggests that the three Fed presidents who opposed keeping the statement unchanged likely had support from at least an equal number of non-voting participants.

Altering the statement could also be seen as constraining the incoming Fed chair, who had expressed support for rate cuts before the Iran conflict erupted.

Timiraos: Rate-cut discussions are nearly over as the Fed begins seriously considering hikes

Nick Timiraos, often referred to as the “Fed whisperer,” said Federal Reserve officials have largely stopped debating the dominant policy question of the past two years — whether to cut rates — and instead began more seriously considering the opposite direction at last month’s meeting: whether rates may need to rise.

The April policy meeting minutes showed that most participants stressed that further tightening could become appropriate if inflation continues to run persistently above 2%.

The April meeting was Jerome Powell’s final meeting as Fed chair, and the minutes highlighted how the Middle East conflict has reshaped the outlook of the rate-setting committee. Warsh will take over leadership of the committee after being sworn in at the White House on Friday.

Iran says it will continue negotiations despite having “strong distrust” toward the United States

Iranian Foreign Ministry spokesperson Esmaeil Baghaei commented on the U.S.-Iran situation, security in the Strait of Hormuz, and U.S. pressure on Iran on the evening of May 20 local time, emphasizing that Tehran would continue negotiations despite maintaining “strong distrust” toward Washington, while firmly defending national interests.

Baghaei said Iran is continuing indirect communication with the United States through Pakistani intermediaries. Tehran’s core demands include ending regional conflicts, unfreezing Iranian overseas assets, and stopping maritime seizures targeting Iranian shipping.

He added that although U.S. actions over the past year and a half have left a negative record, Iran continues to approach diplomacy seriously and in good faith while maintaining “strong and justified distrust” toward the United States.

A June ECB rate hike is now largely certain, though uncertainty remains for July

Four sources said a European Central Bank rate hike in June is now effectively a done deal, though the ECB remains cautious about signaling further action afterward in order to prevent markets from aggressively pricing in another move in July.

The ECB kept rates unchanged in April, but internal discussions reportedly included the possibility of hikes, with officials hinting that action could come in June as energy costs remain elevated.

Sources said the inflation outlook is now evolving toward the ECB’s adverse scenario assumptions, while tensions surrounding Iran continue to show no signs of easing, making policy action necessary at the next meeting.

Inflation has already climbed to 3%, well above the ECB’s 2% target, and after signaling a policy shift, the central bank also needs to preserve its credibility.

They added that even if a peace agreement is reached before the meeting, there is no guarantee it will remain effective, and energy prices are likely to stay elevated for some time because markets need time to normalize.

U.S. crude oil inventories posted a record 17.8 million-barrel plunge last week as exports hit a record high

The U.S. Energy Information Administration (EIA) weekly report showed that total U.S. crude oil inventories, including the Strategic Petroleum Reserve (SPR), plunged by a record 17.8 million barrels last week as the U.S. government aggressively pushed oil exports.

Approximately 9.9 million barrels of the decline came from withdrawals from the SPR.

Meanwhile, inventories at Cushing, Oklahoma — the key delivery hub — declined for a fourth consecutive week and are continuing to approach so-called “tank bottoms.” Traders are increasingly viewing developments at this crucial storage and transportation hub as a leading signal that nationwide inventories may be entering a broader downtrend.

On the import side, total U.S. crude imports surged to their highest level in more than a month, with daily imports exceeding 6 million barrels.

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