The director of the White House National Economic Council, Kevin Hassett, said this Sunday that an agreement between the United States and Iran could reopen the Strait of Hormuz, a passage through which a significant portion of the world’s oil flows, and cause a drop in energy prices sufficient to alleviate inflation and pave the way for the Federal Reserve (Fed) to reduce interest rates. In an interview with Fox News’ Sunday Morning Futures program, he said that the White House already sees signs of caution in the market, with buyers avoiding new spot oil purchases, in the expectation of a sharp drop in prices.
Hassett avoided anticipating an announcement, but said that US President Donald Trump and US Secretary of State Marco Rubio have already spoken clearly about the proximity of an outcome. The speech took place on the same day that Trump stated on social media that negotiations with Tehran were progressing in an “orderly and constructive” manner. The negotiation takes place while Americans pay more than US$4.50 per gallon for gasoline and more than US$5.50 per gallon for diesel, with a barrel of oil close to US$100, according to data cited in the interview.
According to Trump’s advisor, there is a volume of oil trapped in the region and additional production capacity ready to come into operation, especially in Saudi Arabia and the United Arab Emirates. “As soon as there is an agreement, the straits will be opened and the oil will flow again,” he said. He said normalization could release a relevant supply. “There is a very large amount of oil that can reach the market,” he added.
Hassett recalled that, at the beginning of the crisis, there were predictions that a barrel would exceed US$150 if the strait was closed, but the price remained below US$100. “Oil surprised significantly downwards. I hope that gasoline also surprises downwards once the straits are opened”, he said.
In Hassett’s assessment, energy is the main vector of pressure on prices, but not the only one. Deregulation, initiatives to reduce food prices, advancement of artificial intelligence and increased investment work in the opposite direction, he said. Core inflation, which excludes food and energy, “barely moved” in the latest reports. “A lot of people treat energy as if it’s the whole story. But it’s not. And it’s not even the most important part of the story,” he said.
With energy failing, Hassett said, it would be possible to see “negative inflation” because of falling energy prices. “When energy prices fall again, inflation could become negative due to this effect,” he said. In that scenario, he added, there would be “plenty of room for the Fed to do the right thing and cut rates.”
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The statements were made after Kevin Warsh took office as Fed president, succeeding Jerome Powell. Hassett praised the experience of the new leader, who, in 2008, became the youngest Fed governor in history, and highlighted that Trump expects independent and data-based action. “I respect the Fed’s independence and Kevin Warsh’s intellectual capacity. I’m sure he can handle this by looking at the data,” he said.
