Energy prices and inflation concerns erupted, causing expectations of a Federal Reserve rate cut to cool rapidly.
2026-03-13 11:24:45
As energy prices soar and inflation concerns resurface, market expectations for a Federal Reserve rate cut are rapidly declining. Traders have recently abandoned hopes of an earlier-than-expected easing by the Fed in early summer, a shift in thinking that coincides with the US-Israeli attack on Iran and oil prices briefly surging to around $100 a barrel.
Before the conflict erupted, according to calculations by the CME Group's FedWatch Tool, the market expected the Federal Reserve to cut interest rates by 25 basis points in June, possibly again in September, and even a third rate cut depending on economic data. This expectation was based on a softening labor market, slowing inflation, and dovish expectations that a new Fed chairman would take office in May. However, at least during the ongoing escalation of the situation in the Middle East, the market now believes that combating inflation will remain the Fed's top priority.
Goldman Sachs economists said in a report on Wednesday, "A higher inflation path will make it more difficult for the Federal Reserve to initiate rate cuts anytime soon." The agency has officially adjusted its interest rate forecast, postponing the next rate cut from June to September.
However, Goldman Sachs economists still believe the Federal Reserve may cut rates again before the end of 2026. They wrote: "If the labor market weakens earlier and more significantly than we expect, we do not believe that concerns about the impact of higher oil prices on inflation and inflation expectations will be an obstacle to an earlier rate cut."
Other market participants are more cautious. According to the CME FedWatch Tool, federal funds futures traders have ruled out a September rate cut, currently pricing in only a December cut , with additional cuts not expected until late 2027 or even early 2028. Despite President Trump's nominee Kevin Warsh succeeding Jerome Powell as Fed chairman in May and being seen as leaning towards aggressive easing, the market has not priced in further rate cuts.
Whether this expectation will persist likely depends on developments in the Middle East. If the conflict eases, markets may return to normal, rekindling hopes for further easing.
Even with Brent crude settling above $100, Trump still urged Powell to cut interest rates immediately. He posted on Truth Social: "Where is Fed Chairman Powell today? He should cut rates now, not wait until the next meeting!"
On Friday, the U.S. Commerce Department will release the January PCE figures. Economists surveyed by Dow Jones expect the core PCE, which is closely watched by Federal Reserve officials, to rise to 3.1% year-on-year, up 0.1 percentage point from December, further away from the Fed's 2% target. This reading would indicate that inflationary pressures had already begun to build before the Iranian attack, potentially making Fed officials more cautious about the prospect of interest rate cuts.
In a report, Bank of America economist Stephen Juneau stated that while some key components, particularly housing, showed signs of stabilization or decline, overall inflation "remains within range, above the 2% core PCE level." He added, "The conclusion is that the Fed should not rush into further easing of interest rates."
The Federal Open Market Committee (FOMC) will announce its next interest rate decision on March 18, and traders currently rate the committee at nearly 100% that it will keep interest rates unchanged.
Overall , the oil price shock and rising inflation expectations triggered by the Iranian conflict are significantly altering market expectations regarding the Federal Reserve's course of action. The shift from a potential three rate cuts to only one, or even a delay until the end of the year, indicates that energy geopolitical risks have become the dominant variable.
Federal Reserve Chairman Jerome Powell's term will end in May, and while the new chairman, Kevin Warsh, is considered dovish, he is unlikely to reverse market concerns about inflation in the short term. Future market trends will heavily depend on whether tensions in the Middle East ease, whether oil prices fall, and whether the upcoming PCE data confirms continued inflationary pressures.
Investors should closely monitor the FOMC decision on March 18 and geopolitical developments to assess the real likelihood of a shift in monetary policy.
Goldman Sachs predicts two rate cuts this year.
Before the conflict erupted, according to calculations by the CME Group's FedWatch Tool, the market expected the Federal Reserve to cut interest rates by 25 basis points in June, possibly again in September, and even a third rate cut depending on economic data. This expectation was based on a softening labor market, slowing inflation, and dovish expectations that a new Fed chairman would take office in May. However, at least during the ongoing escalation of the situation in the Middle East, the market now believes that combating inflation will remain the Fed's top priority.
Goldman Sachs economists said in a report on Wednesday, "A higher inflation path will make it more difficult for the Federal Reserve to initiate rate cuts anytime soon." The agency has officially adjusted its interest rate forecast, postponing the next rate cut from June to September.
However, Goldman Sachs economists still believe the Federal Reserve may cut rates again before the end of 2026. They wrote: "If the labor market weakens earlier and more significantly than we expect, we do not believe that concerns about the impact of higher oil prices on inflation and inflation expectations will be an obstacle to an earlier rate cut."
The prospect of a second interest rate cut is bleak.
Other market participants are more cautious. According to the CME FedWatch Tool, federal funds futures traders have ruled out a September rate cut, currently pricing in only a December cut , with additional cuts not expected until late 2027 or even early 2028. Despite President Trump's nominee Kevin Warsh succeeding Jerome Powell as Fed chairman in May and being seen as leaning towards aggressive easing, the market has not priced in further rate cuts.
Whether this expectation will persist likely depends on developments in the Middle East. If the conflict eases, markets may return to normal, rekindling hopes for further easing.
Even with Brent crude settling above $100, Trump still urged Powell to cut interest rates immediately. He posted on Truth Social: "Where is Fed Chairman Powell today? He should cut rates now, not wait until the next meeting!"
This week's PCE data may further impact expectations.
On Friday, the U.S. Commerce Department will release the January PCE figures. Economists surveyed by Dow Jones expect the core PCE, which is closely watched by Federal Reserve officials, to rise to 3.1% year-on-year, up 0.1 percentage point from December, further away from the Fed's 2% target. This reading would indicate that inflationary pressures had already begun to build before the Iranian attack, potentially making Fed officials more cautious about the prospect of interest rate cuts.
In a report, Bank of America economist Stephen Juneau stated that while some key components, particularly housing, showed signs of stabilization or decline, overall inflation "remains within range, above the 2% core PCE level." He added, "The conclusion is that the Fed should not rush into further easing of interest rates."
The Federal Open Market Committee (FOMC) will announce its next interest rate decision on March 18, and traders currently rate the committee at nearly 100% that it will keep interest rates unchanged.
Overall , the oil price shock and rising inflation expectations triggered by the Iranian conflict are significantly altering market expectations regarding the Federal Reserve's course of action. The shift from a potential three rate cuts to only one, or even a delay until the end of the year, indicates that energy geopolitical risks have become the dominant variable.
Federal Reserve Chairman Jerome Powell's term will end in May, and while the new chairman, Kevin Warsh, is considered dovish, he is unlikely to reverse market concerns about inflation in the short term. Future market trends will heavily depend on whether tensions in the Middle East ease, whether oil prices fall, and whether the upcoming PCE data confirms continued inflationary pressures.
Investors should closely monitor the FOMC decision on March 18 and geopolitical developments to assess the real likelihood of a shift in monetary policy.
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