Bank of America has indicated that investors betting the Federal Reserve will adopt a hawkish policy in response to rising oil prices may be misjudging the situation. The bank further cautioned that an actual supply shock could instead lead the Fed to keep interest rates steady or, in extreme cases, trigger significant rate cuts to cushion the economic impact. Although the two-year U.S. Treasury yield has risen alongside surging oil prices since the outbreak of conflict involving Iran—reflecting market expectations of potential Fed tightening—economist Aditya Bhave warned that this outlook "may be a miscalculation." He emphasized that the transmission mechanism of an energy supply shock to monetary policy is not straightforward. When soaring oil prices simultaneously drive up inflation expectations and dampen economic growth momentum, the Fed faces a difficult trade-off between its dual mandates of price stability and maximum employment. This dual pressure could actually reduce the necessity for hawkish rate hikes. As he elaborated in a Tuesday report, "Energy shocks significantly 'fatten' the tail risks in the policy distribution: they may extend the period of unchanged rates, while also raising the probability of both tail-risk hikes and extreme rate-cut scenarios." Since the start of the month, short-term Treasury yields have climbed by about 20 basis points, with traders now pricing in roughly 40 basis points of Fed rate cuts this year, down from more than 60 basis points before the conflict. On Tuesday, international oil prices retreated sharply after breaching $100 per barrel, but supply risks remain elevated as Middle Eastern output cuts intensify—global crude supply has fallen by about 6%, and shipping through the Strait of Hormuz, a critical global energy transit route, remains largely stalled. Bhave noted similarities between the current market reaction and the period following the escalation of the Russia-Ukraine conflict in 2022, when U.S. unemployment was low and consumers had ample fiscal stimulus funds. However, the U.S. now faces a softer labor market, moderately elevated inflation, and relatively modest fiscal support. He stressed, "If the oil supply shock persists, it significantly raises the likelihood of a dovish pivot by the Fed."