Kevin Hassett, Director of the National Economic Council, spoke to FOX Business on Friday about US monetary policy and energy markets. He said the Federal Reserve outlook for having room to cut interest rates will be very solid.
He said the Strait of Hormuz can be reopened within two months and that backup plans exist to reopen it. He also said energy prices are expected to fall rapidly once the strait reopens.
He said boat traffic through the Strait of Hormuz is running at a 10% pace compared with normal.
Looking back to early 2025, we were told the Strait of Hormuz would reopen within two months, but it ultimately took closer to four. This delay caused a significant spike in crude oil volatility before the eventual price collapse. The initial optimism from officials created a trap for traders who positioned for an immediate drop in energy prices.
WTI crude futures, which were trading around $95/barrel during the peak of the 2025 closure, briefly touched $120 before plummeting into the low $70s by the end of that year. This pattern was a more extreme version of what we saw during the brief Suez Canal blockage back in 2021. The CBOE Crude Oil Volatility Index (OVX) surged over 40% during that period, rewarding traders who had bought straddles or strangles instead of making a simple directional bet.
The expectation for a Fed rate cut based on falling energy prices was correct in direction but wrong on timing. The initial price spike delayed the Fed’s action, as they waited for inflation data to truly reflect the Strait’s reopening. This taught us that geopolitical events create a lag in monetary policy that can be profitably traded through options on interest rate futures.
With current tensions now rising near other key chokepoints, we should anticipate a similar pattern if shipping lanes are threatened. We should be looking at buying long-dated call options on energy stocks and futures to capture the initial price spike from uncertainty. These positions should be paired with shorter-dated puts to profit from the eventual price drop once the situation resolves.
Traders should also consider selling short-term, out-of-the-money puts on interest rate futures. This position bets that the Fed will, like in 2025, hesitate to cut rates immediately due to a potential short-term inflationary shock. Current CME FedWatch tool data shows the market is pricing in over a 50% chance of a rate cut by August, a probability that seems overly optimistic given the lessons of last year.
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