Fed’s Goolsbee: I could see circumstances for rate hikes By Investing.com

Chicago Fed President Austan Goolsbee said the Fed could either raise rates or resume cuts depending on how the Middle East war affects the economy, stressing inflation must be prioritized; the Fed left rates unchanged last week and still signaled one cut this year. Since the meeting investors have priced in higher rates amid inflation fears and higher oil prices related to the Iran war, with fed funds futures showing greater odds of a 2026 hike and one Fed official penciling in a 2025 hike for the first time in 2.5 years.

Analysis

An energy-driven inflation re-acceleration from Middle East risk is behaving like a fiscal shock to producer margins: higher crude raises shipping, fertilizer and petrochemical costs which usually show up in headline CPI within 1–3 months and migrate into core goods inflation over 3–6 months. That pass-through forces the Fed into a two-way conditional path — a small upward shock to expected path of policy that can persist given sticky services wages, meaning real yields are likely to rise and long-duration risk assets reprice over the next quarter.

Market pricing has already shifted to bake a higher-for-longer narrative in the back half of the curve, compressing term premium unpredictably; this creates asymmetric returns for Treasury curve trades (front-end volatility > long-end when geopolitical risk toggles). The short-term second-order winners are commodity producers and parts of financials that benefit from wider NIMs, while losers are rate-sensitive yield vehicles (REITs, long-duration tech) and corporates with high energy intensity that can’t pass costs immediately.

Catalysts that will flip the script are clear and near-term: a diplomatic de-escalation or a 60–90 day decline in Brent > 15% would push CPI back down and restore cut expectations; conversely, sustained Brent > $85–90 for two consecutive months would materially raise the probability of Fed inaction or even hikes into 2026. Tail risks include a demand shock (global growth slowdown) that would actually force the Fed to cut despite commodity-driven inflation — producing rapid curve steepening and violent reversals in crowded long-duration shorts.

Key Decisions for Investors

• Buy inflation protection: increase 5–10yr TIPS exposure via TIP (iShares TIPS ETF) by 1–2% notional, horizon 3–12 months. R/R: protects portfolio if breakevens widen; downside if Fed quickly pivots to cuts — trim if 5y breakeven falls >40bps.
• Energy producers: initiate long positions in US E&P names (e.g., PXD, DVN) sized 1–2% each, horizon 3–9 months. R/R: asymmetric upside if oil sustains >$85 (target +25–40%); stop-loss -15% if WTI < $70 for 30 days.
• Rate-sensitivity pair: long regional-bank ETF KRE (1% notional) vs short US REIT ETF VNQ (1% notional), horizon 3–6 months. R/R: captures widening NIMs vs duration pain in REITs; risk is a growth shock that hurts both — cut if KRE underperforms broad banks by >8% in 30 days.
• Tail hedge / volatility play: buy inexpensive put protection on TLT (one- to six-month put spread) sized 0.5–1% notional to guard against a faster-than-expected rise in real rates. R/R: limits portfolio drawdown from a sudden re-steepening; cost is small premium if rates stay anchored.