With the ceasefire agreement reached between the United States and Iran, financial market expectations for the Federal Reserve's monetary policy have shifted significantly. Traders are beginning to seriously consider the possibility of a Fed rate cut before the end of the year, and expectations for rate cuts, previously suppressed by the Iranian conflict pushing up energy prices, are rapidly resurfacing.

This change not only reflects market optimism about easing geopolitical risks, but also adds new uncertainty to the global economic outlook.

Market expectations have reversed sharply, and the probability of an interest rate cut has increased significantly.

On Wednesday (April 8) in Asian trading, market expectations for a Federal Reserve rate cut this year rose significantly. According to the CME Group's FedWatch Tool, the market's implied probability of a rate cut rose to approximately 43% at one point. This tool calculates market expectations for Fed action using 30-day federal funds futures contracts.

Current market pricing indicates that the benchmark overnight lending rate for December is expected to be 3.5%, lower than the current effective interest rate level of 3.64%.

Before the ceasefire announcement, the probability of this rate cut was only 14%. Previously, traders generally believed that the Federal Reserve would find it difficult to implement rate cuts this year because the conflict in Iran had caused energy prices to soar, seriously threatening the Fed's efforts to keep inflation at its 2% target.

However, after Israel launched its most devastating airstrike to date on Lebanon on Wednesday, killing 254 people, Tehran accused the US and Israel of violating the agreement, saying that continuing negotiations was "unreasonable." The Strait of Hormuz remains closed to unauthorized vessels. Market expectations for a Federal Reserve rate cut this year have fallen again, currently standing at approximately 23.8%.

The ceasefire agreement eased inflation concerns and reopened policy space.

Following the ceasefire agreement, market sentiment quickly shifted to support interest rate cuts.

"The market is currently pricing in a clear bias that the Fed may cut rates once this year," Krishna Guha, global head of policy and central bank strategy at Everco ISI, said in a report. He believes that if a flawed but still acceptable agreement is eventually reached, there is still room for this repricing to continue, as the likelihood of an imminent inflation shock threatening inflation expectations has now been significantly reduced.

Guha added that this trend applies not only to the Federal Reserve, but could also affect major central banks around the world, such as the Bank of England, the European Central Bank, and the Bank of Japan.

This week's inflation data will be a key test.

The US will release two important inflation data sets this week, providing the market with different perspectives.

The U.S. Commerce Department will release the PCE price index on Thursday, the Federal Reserve's most closely watched inflation indicator, which will reflect inflation in February before the outbreak of the Middle East war. On Friday, the U.S. Bureau of Labor Statistics will release the March CPI, which will reflect the price impact after the outbreak of the war.

According to the consensus of economists surveyed by Dow Jones, the overall PCE inflation rate in February is expected to be 3%, and the core inflation rate (excluding food and energy) is expected to be 2.8%. The overall CPI inflation rate in March is expected to be 3.3%, and the core inflation rate is expected to be 2.7%. The overall indicators will clearly reflect the energy price increases caused by the war.

The minutes of the Fed's March meeting released cautiously optimistic signals.

According to the minutes of the March 17-18 Federal Open Market Committee (FOMC) meeting released Wednesday, despite the high degree of uncertainty caused by the war in Iran, most members still expect interest rates to be lowered this year. The members emphasized the need to maintain policy flexibility and adjust their stance flexibly based on the latest data, the evolving economic outlook, and the balance of risks.

Most committee members pointed out that if rising oil prices impact the labor market and consumer spending, the war may require the Federal Reserve to adopt a more accommodative monetary policy.

At the same time, they were also concerned that continued high oil prices could lead to persistently high inflation, necessitating interest rate hikes. However, most committee members believed it was too early to assess the impact of the Middle East situation on the US economy and that close monitoring was still necessary.

Ultimately, the Federal Open Market Committee voted 11-1 to maintain the target range for the benchmark interest rate at 3.5%-3.75%. The only dissenting voice was Stephen Miran, who advocated for an immediate 25-basis-point rate cut.

The future policy path remains uncertain.

Guha predicts that if subsequent data is reassuring, the Federal Reserve's policy stance may shift to a more dovish stance starting in late summer, with one or even two rate cuts expected this year. Citigroup is even more optimistic, believing that if oil prices continue to fall and inflation remains moderate, the Fed may cut rates three times starting in September.

Overall , the US-Iran ceasefire agreement has injected a strong boost into the market, significantly increasing expectations for a Federal Reserve rate cut this year. However, whether this fragile ceasefire can be sustained in the long term remains a key variable determining the future direction of monetary policy. If the situation in the Middle East deteriorates again and energy prices rebound, the Fed's rate-cutting path may face another test. Global investors are closely watching this week's inflation data and subsequent geopolitical developments to determine whether this policy shift can truly be implemented.