Gas prices in the United States have fallen below $4! The expectation of the reopening of the Strait of Hormuz is challenging the hawkish script of the Federal Reserve.

The price of gasoline in the United States has fallen below $4 per gallon for the first time since March, bringing a welcome relief to American consumers who have been impacted by high energy costs all year. Gasoline prices usually have a quick impact on overall inflation, improving cash flow for low-income families and releasing some discretionary spending power. For Federal Reserve policymakers, if gasoline prices continue to fall, it will reduce the tail risks of "reinflationary impact," potentially reigniting market expectations of a rate cut by the Fed after months of cooling. According to data from the American Automobile Association, on Thursday the average price of regular unleaded gasoline in the United States was $3.999. As the US and Iran signed a temporary agreement to end the Middle East geopolitical conflict and agreed to reopen the Strait of Hormuz, international oil prices - WTI and Brent crude, as well as important gasoline prices for economic activity, all experienced sharp declines. With the recent significant drop in global oil prices, gas station prices have fallen from a peak of over $4.50 per gallon in May. Record US exports, a larger-than-expected slowdown in overall demand from energy-consuming countries in Asia such as China, and limited ongoing transportation through the strait continue to weigh on Brent crude prices, which have now fallen below $80 per barrel for the first time in over three months. The temporary peace/ceasefire agreement reached between the US and Iran will immediately lift the blockade on Iran's oil exports and gradually reopen the Strait of Hormuz, which accounts for 20% of global energy trade flows, paving the way for final nuclear agreement negotiations over the next 60 days. Trump told the media that he signed a memorandum of understanding (MOU) with Iran at the Palace of Versailles near Paris, with a US official stating that the agreement had taken immediate effect. However, it is not yet clear whether Iran has taken immediate steps to fully reopen the Strait of Hormuz. For the global markets, this agreement is seen as significantly reducing geopolitical tail risks and potentially alleviating further disruptions in global energy supply. However, some experts point out that at an average of $3.999 per gallon, prices are still much higher than pre-war levels, and it is expected to take until next year to return to those normalized levels. As many Americans rely on cars for daily essential travel, they have thus far had to bear higher fuel costs. The result is rising inflation, squeezing household budgets, which in turn spills over to a broader economy as money spent at gas stations reduces funds available for non-essential spending. Politically, lower gas station prices represent a victory for the White House and US President Donald Trump, who has repeatedly emphasized that prices would drop after the war. As the midterm elections approach, Democrats are using the issue of gas costs and other inflation problems to challenge the Republicans led by Trump. The White House has also utilized a series of policy tools to limit rising costs, including exempting the Jones Act and tapping into the Strategic Petroleum Reserve. Currently, traders are focusing on the rate of replenishment of US oil inventories to determine if further price drops are imminent. The latest gasoline stocks are at their lowest levels in over a decade for the same period. On June 18, the average price of regular gasoline in the US was $3.999 per gallon, as Brent crude fell to around $77.41 per barrel and WTI to around $74.43 per barrel, returning to the low levels seen since early March mainly due to the improved oil supply expectations from the US-Iran agreement. These downward oil price data undoubtedly provide direct relief to American consumers: falling gasoline prices quickly push down overall inflation, improve cash flow for low-income households, and release some discretionary spending power; however, their impact on core inflation may be slower, mainly reflected indirectly through transportation costs, business input costs, and inflation expectations. The continuing decline in oil prices is at the core of Citigroup's contrarian bet on three rate cuts. For the Federal Reserve, the decline in oil prices will reduce the tail risks of "reinflationary impact," but it is not enough to change policy direction on its own. The key is that the Federal Reserve has already turned hawkish internally: the latest FOMC monetary policy decisions and interest rate dot plot show that out of 19 Federal Reserve officials, 9 expect the possibility of rate hikes in 2026, with the policy rate still maintained in the range of 3.50%-3.75%; and the May retail sales data also show resilience in consumer spending, with sales at gas stations increasing sharply by 3.4%, and overall retail sales growing by 0.9% month-on-month in May. Therefore, the drop in oil prices will lead the market to bet on "inflation peaking," but what the Federal Reserve really needs to see is whether the drop in energy prices can be sustained, if housing inflation slows down, if wage growth cools, and if consumer spending shifts from strong to moderate. The trajectory of oil price declines is one of the key logics that distinguishes Citigroup's contrarian bet on "three rate cuts by the Federal Reserve this year" from the unanimous hawkish expectations of the major Wall Street banks. The US-Iran agreement and the gradual reopening of the Strait of Hormuz are squeezing out the "war risk premium" embedded in oil and gasoline prices. Citigroup has lowered its average Brent prices for the third and fourth quarters of 2026 to $75 and $70 per barrel respectively, and has lowered its Brent price forecast for 2027 from $80 to $65 per barrel; the main reason is the restoration of Gulf trade flow and normalization of the energy transportation system, and in its latest research report, Citigroup gives its non-consensus judgments that the Federal Reserve policymakers will each cut rates by 25 basis points in October, December, and January 2027. In contrast, Kaplan, Vice Chairman of Goldman Sachs and former Dallas Fed President, stated that if inflation remains high, the Federal Reserve may need to raise rates as early as September, and he also pointed out that Federal Reserve policy actions are rarely "one-off operations," rate adjustments usually occur in the form of two or three consecutive actions. He added: "Therefore, I believe we must be prepared if action is taken in September. There may be one or even two rate hikes thereafter." However, the Citigroup analyst team also acknowledges that for this scenario to materialize, three conditions must occur simultaneously: the full recovery of the Strait of Hormuz and the ceasefire situation between the US and Iran not reversing, oil prices continuing to feed into CPI/PCE, and sufficient cooling in employment and consumer markets. Otherwise, if oil prices only temporarily fall but core inflation and employment remain strong, the Fed is more likely to maintain high rates or even keep the option of raising rates available.