War shatters expectations of interest rate cuts! The Fed is cornered by oil prices: the probability of a rate hike now exceeds that of a rate cut.
2026-03-18 10:11:26
The Iran war has completely overturned the Federal Reserve's outlook on borrowing costs. The Atlanta Fed's market probability tracker shows that, for the first time in several years, financial markets are pricing in a 25% higher probability of a Fed rate hike (20%) than a 20% probability of a rate cut in the next three months. On the eve of the war, the probability of a rate cut was as high as 40%, while the probability of a rate hike was only 5%. Soaring energy prices are dragging down inflation, forcing the Fed to reassess its tightening path, with short-term hawkish expectations dominating the market.
The two-day Federal Reserve meeting, which begins this Wednesday (March 18), is expected to keep interest rates unchanged, but hawkish expectations dominate the market in the short term, and the future path will depend on the duration of the conflict.
According to the Atlanta Fed's market probability tracker, which is based on trading data from CME Group and the New York Fed: the probability of a rate hike in the next 3 months is 25%; the probability of a rate cut is 20%; and the probability of keeping rates unchanged is dominant (98.9% probability of no change at Wednesday's meeting).
This is the first time since the start of this interest rate hike cycle that the market has priced in a higher probability of a rate hike than a rate cut, indicating that the Iran war has substantially altered the expected path of monetary policy .
On the eve of the war, the market priced in a 40% probability that the Federal Reserve would cut interest rates next, with only a 5% probability of a rate hike. However, the war with Iran caused energy prices to soar and inflation expectations to reignite, completely reversing expectations within just two weeks.
The market has significantly reduced its bets on a 2026 rate cut, and even priced in the tail risks of a rate hike. The Federal Reserve's dual mandate (full employment + price stability) is once again caught in a dilemma: the energy shock is pushing up inflation, requiring a tightening response, but at the same time, curbing growth and employment requires easing support.
The disruption of the Strait of Hormuz has blocked one-fifth of the world's oil supply, causing oil prices to fluctuate at high levels, rising nearly 50% in two weeks. The energy shock has spread from gasoline and jet fuel to transportation, chemicals, manufacturing, and agriculture, pushing up core inflation and the cost of living.
Federal Reserve officials need to assess whether the conflict could lead to persistently high inflation or a stagflation scenario of "slowing inflation followed by rising inflation." In the short term, a hawkish stance prevails, and discussions about interest rate hikes have resurfaced.
The Federal Reserve needs to balance price stability and full employment. The unexpected loss of 92,000 nonfarm payroll jobs in February indicates a risk of slowing growth, but soaring oil prices have reignited inflationary pressures.
Too rapid easing could repeat the runaway inflation seen in 2021-2022; premature tightening would exacerbate the risk of an economic slowdown.
Market pricing has shifted towards "higher and longer," and short-term financial conditions are tightening. The energy crisis may be the "last straw," and the risk of stagflation has increased significantly.
The FOMC is expected to keep the interest rate unchanged at 3.5%-3.75% at Wednesday's meeting, with CME FedWatch showing a 98.9% probability. Given the high degree of uncertainty, the simplest approach might be to stick to the December forecast—only one rate cut this year.
Markets will be closely watching the policy statement, the Summary of Economic Projections (SEP), the dot plot, and Powell's assessment of the impact of the Middle East conflict in his press conference. Any hawkish rhetoric could trigger further tightening of financial conditions.
Short-term hawkish expectations dominate the market: oil prices continue to fluctuate at high levels, inflation expectations are stubbornly rising, the path of interest rate cuts has been significantly delayed, and even the tail risks of interest rate hikes have been factored in.
The path of medium- to long-term interest rates depends on the intensity and duration of the conflict: if it ends in a few weeks and supply recovers quickly, expectations of interest rate cuts may resume; if it becomes a protracted conflict, the risk of stagflation will rise sharply, and the Federal Reserve may be forced to discuss restarting interest rate hikes.
Investors should be wary of changes to next week's meeting statement and dot plot, and pay attention to the Energy Minister's forecasts and battlefield developments, as volatility is extremely high.
The Iran war has completely overturned the Federal Reserve's outlook on borrowing costs. The Atlanta Fed tracker now shows a 25% probability of a rate hike over the next three months, higher than a 20% probability of a rate cut—a first in this cycle. The pre-war rate cuts of 40% versus a 5% rate hike have now been completely reversed. Oil prices have surged nearly 50% in two weeks, exacerbating inflation concerns and further complicating the Fed's dual mandate.
Wednesday's meeting is expected to remain unchanged, sticking with the "only one cut" forecast from last December. Short-term hawkish expectations dominate, while the medium- to long-term outlook depends on the intensity and duration of the conflict. Investors need to pay attention to the policy statement, the dot plot, and the tone of Powell's press conference; any hawkish signals could trigger further tightening of financial conditions. The energy crisis could be the "last straw," significantly increasing the risk of stagflation.
The two-day Federal Reserve meeting, which begins this Wednesday (March 18), is expected to keep interest rates unchanged, but hawkish expectations dominate the market in the short term, and the future path will depend on the duration of the conflict.
The probability of an interest rate hike is greater than the probability of an interest rate cut in the next three months.
According to the Atlanta Fed's market probability tracker, which is based on trading data from CME Group and the New York Fed: the probability of a rate hike in the next 3 months is 25%; the probability of a rate cut is 20%; and the probability of keeping rates unchanged is dominant (98.9% probability of no change at Wednesday's meeting).
This is the first time since the start of this interest rate hike cycle that the market has priced in a higher probability of a rate hike than a rate cut, indicating that the Iran war has substantially altered the expected path of monetary policy .
Pre-war interest rate cuts of 40% versus interest rate hikes of only 5% have now completely reversed.
On the eve of the war, the market priced in a 40% probability that the Federal Reserve would cut interest rates next, with only a 5% probability of a rate hike. However, the war with Iran caused energy prices to soar and inflation expectations to reignite, completely reversing expectations within just two weeks.
The market has significantly reduced its bets on a 2026 rate cut, and even priced in the tail risks of a rate hike. The Federal Reserve's dual mandate (full employment + price stability) is once again caught in a dilemma: the energy shock is pushing up inflation, requiring a tightening response, but at the same time, curbing growth and employment requires easing support.
Soaring energy prices are dragging down inflation, forcing the Federal Reserve to reassess its tightening path.
The disruption of the Strait of Hormuz has blocked one-fifth of the world's oil supply, causing oil prices to fluctuate at high levels, rising nearly 50% in two weeks. The energy shock has spread from gasoline and jet fuel to transportation, chemicals, manufacturing, and agriculture, pushing up core inflation and the cost of living.
Federal Reserve officials need to assess whether the conflict could lead to persistently high inflation or a stagflation scenario of "slowing inflation followed by rising inflation." In the short term, a hawkish stance prevails, and discussions about interest rate hikes have resurfaced.
The dual missions of employment and inflation are once again caught in a dilemma, with high oil prices amplifying the risk of stagflation.
The Federal Reserve needs to balance price stability and full employment. The unexpected loss of 92,000 nonfarm payroll jobs in February indicates a risk of slowing growth, but soaring oil prices have reignited inflationary pressures.
Too rapid easing could repeat the runaway inflation seen in 2021-2022; premature tightening would exacerbate the risk of an economic slowdown.
Market pricing has shifted towards "higher and longer," and short-term financial conditions are tightening. The energy crisis may be the "last straw," and the risk of stagflation has increased significantly.
Interest rates are expected to remain unchanged on Wednesday, with market signals overwhelmingly unanimous.
The FOMC is expected to keep the interest rate unchanged at 3.5%-3.75% at Wednesday's meeting, with CME FedWatch showing a 98.9% probability. Given the high degree of uncertainty, the simplest approach might be to stick to the December forecast—only one rate cut this year.
Markets will be closely watching the policy statement, the Summary of Economic Projections (SEP), the dot plot, and Powell's assessment of the impact of the Middle East conflict in his press conference. Any hawkish rhetoric could trigger further tightening of financial conditions.
Short-term hawkish expectations dominate. Medium- to long-term prospects depend on the intensity and duration of the conflict.
Short-term hawkish expectations dominate the market: oil prices continue to fluctuate at high levels, inflation expectations are stubbornly rising, the path of interest rate cuts has been significantly delayed, and even the tail risks of interest rate hikes have been factored in.
The path of medium- to long-term interest rates depends on the intensity and duration of the conflict: if it ends in a few weeks and supply recovers quickly, expectations of interest rate cuts may resume; if it becomes a protracted conflict, the risk of stagflation will rise sharply, and the Federal Reserve may be forced to discuss restarting interest rate hikes.
Investors should be wary of changes to next week's meeting statement and dot plot, and pay attention to the Energy Minister's forecasts and battlefield developments, as volatility is extremely high.
Editor's Summary
The Iran war has completely overturned the Federal Reserve's outlook on borrowing costs. The Atlanta Fed tracker now shows a 25% probability of a rate hike over the next three months, higher than a 20% probability of a rate cut—a first in this cycle. The pre-war rate cuts of 40% versus a 5% rate hike have now been completely reversed. Oil prices have surged nearly 50% in two weeks, exacerbating inflation concerns and further complicating the Fed's dual mandate.
Wednesday's meeting is expected to remain unchanged, sticking with the "only one cut" forecast from last December. Short-term hawkish expectations dominate, while the medium- to long-term outlook depends on the intensity and duration of the conflict. Investors need to pay attention to the policy statement, the dot plot, and the tone of Powell's press conference; any hawkish signals could trigger further tightening of financial conditions. The energy crisis could be the "last straw," significantly increasing the risk of stagflation.
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