Reopened Strait of Hormuz and falling oil prices may recast Fed's options for future cuts

By Howard Schneider and Ann Saphir

WASHINGTON, April 17 (Reuters) - Reopened Middle East shipping and plummeting oil prices on Friday boosted bets the U.S. Federal Reserve may begin cutting interest rates as soon as December, but officials still face a tangled outlook ahead of their April 28-29 policy meeting.

Iran's announced reopening of the Strait of Hormuz pushed oil below $90 a barrel for the first time in more than five weeks, but Fed officials will

still need to sort out how much damage the seven-week conflict has done to underlying price trends, whether hostilities are over for good, and whether they are now confident inflation will decline to their 2% target. Following a ceasefire announcement between Israel and Lebanon, Iran said on Friday it would reopen the strait to shipping for the duration of a ceasefire with the U.S., which was already in effect. Oil prices that had been stuck around $95 a barrel plunged below $89, and traders in contracts tied to Fed interest rates changed their view from the central bank remaining sidelined until well into 2027 to a resumption of rate cuts by late this year.

In a recent Reuters interview, San Francisco Fed President Mary Daly noted how the evolution of the conflict, and the possible response of oil prices if hostilities were to ease, could influence the Fed's confidence inflation will begin to ease from current levels about a percentage point above the central bank's target.

"As long as we have the conflict resolved soon, you would find us in a place where it just takes longer, but it doesn't stall the progress" on inflation, Daly said. "It just takes longer for all that to work itself through." (Reporting by Howard Schneider and Ann Saphir, Editing by Chizu Nomiyama )