Fed’s hawkish pivot on oil shock hits gold, with 1 asset showing resilience

The Federal Reserve has signaled a significant hawkish policy shift in response to soaring energy prices from the five-week-old war in Iran, pushing bond yields higher and creating a clear performance gap between gold and Bitcoin.

"The tendency is to look through any kind of a supply shock,” Fed Chair Jerome Powell said Monday during a moderated conversation at Harvard University. “But a critical, essential aspect of that is you have to carefully monitor inflation expectations.”

The conflict, which has seen Iran blockade the critical Strait of Hormuz shipping lane, has pushed Brent crude past $116 a barrel and sent U.S. gas prices toward $4 per gallon. In response, bond markets have erased bets on Fed rate cuts for 2026, with the 10-year Treasury yield rising sharply. This pushed the average 30-year mortgage rate to 6.38 percent last week, up from a February low of 5.98 percent, according to Freddie Mac.

The policy pivot puts the Fed, which has held its benchmark rate in a 3.5 percent to 3.75 percent range since March, in a difficult position of choosing between fighting renewed inflation and supporting a precarious labor market. With markets now pricing in a 77 percent chance of no rate cuts this year, per CME Fedwatch data, the central bank's next moves will depend on whether the public's long-term inflation expectations remain anchored.

Inflation Fears Mount

The oil shock is the latest in a series of inflationary pressures the Fed has faced over the past five years, following tariffs and pandemic-related supply disruptions. The primary concern for policymakers is that a sustained period of high energy prices could unmoor the public's belief that inflation will eventually return to the Fed's 2 percent target.

“We have had five years now of inflation at elevated levels, and near-term inflation expectations have risen again, so I am particularly concerned that yet another price shock could increase longer-term inflation expectations,” Fed Governor Michael Barr said last week. “We need to be especially vigilant.”

This echoes concerns Powell raised at his March 18 press conference. "It’s a repeated set of things, and you worry that’s the kind of thing that can cause trouble for inflation expectations," Powell said, alluding to fears of a 1970s-style dynamic that required punishing rate hikes to resolve.

Diverging Asset Paths

The Fed's hawkish turn has strengthened the U.S. dollar and increased the opportunity cost of holding non-yielding assets, putting significant pressure on gold (XAU/USD). The precious metal has traditionally served as a safe haven during geopolitical turmoil, but the prospect of higher-for-longer interest rates has undermined its appeal.

In contrast, Bitcoin (BTC) has demonstrated relative price stability, bolstering the narrative among some investors that it can act as a non-correlated store of value. While a prolonged risk-off environment driven by a global energy crisis could eventually impact all asset classes, Bitcoin's resilience in the face of a hawkish Fed marks a notable divergence from gold's reaction. For now, policymakers remain in a "wait and see" mode, hoping the vigilant posture alone is enough to keep inflation psychology contained as they await new data.

This article is for informational purposes only and does not constitute investment advice.