Will the Fed cut rates by at least 25bp before December 31, 2026?
The Condition
Strait of Hormuz commercial traffic returns to >50% of pre-crisis baseline for 7+ consecutive days before September 30, 2026
Our Ensemble Estimates
Given Hormuz reopens: Will the Fed cut rates by at least 25bp before December 31, 2026?
Given Hormuz stays closed: Will the Fed cut rates by at least 25bp before December 31, 2026?
Causal Effect
Hormuz reopening worth ~28pp to Fed rate cut probability (43% if reopens vs 15% if closed). Reopening removes the primary supply-driven inflation constraint, allowing the FOMC to respond to the LOOSENING labor market and MODERATING wages.
Why This Matters
Tests whether Hormuz reopening removes the supply-side inflation constraint that has frozen the Fed. The Fed faces a classic supply-shock dilemma: rate hikes would compress demand but cannot resolve supply bottlenecks, while rate cuts would stimulate demand into an already-disrupted supply chain. If Hormuz reopens, oil prices should decline substantially (compressing the $50-58/bbl risk premium), which would accelerate the ACCELERATING-to-PERSISTENT inflation downgrade already underway. With wages already moderating (AHE 3.5%, MoM 2.9%) and Michigan expectations at 3.4%, the removal of the oil supply shock could open a window for the Fed to cut by the December 2026 FOMC meeting. Financial conditions at NEUTRAL (NFCI -0.434) suggest the economy does not need emergency rate support, but the grinding stagnation pattern (6-month NFP average +15K) provides a growth-side argument for easing.
Condition Resolved
The condition was FALSE. The IF FALSE branch is now the active prediction.
Resolution Criteria
The FOMC target rate as of December 31, 2026 is at least 25 basis points below the rate as of April 4, 2026
Source Analysis
Inflation ACCELERATING but at weakest boundary — only 1 of 5 triggers firmly active (core PCE 3-month at 3.7%). Michigan 1Y expectations fell to 3.4% (contradicting de-anchoring). TIPS borderline at 2.61%. One more favorable data point justifies downgrade to PERSISTENT. Wages moderating at fastest pace since 2021 (AHE 3.5%, MoM 2.9%).