Markets’ Hopes for Fed Interest Rate Cuts Are Rapidly Fading Away

  • As both energy prices and inflation fears pop, expectations for Federal Reserve (Fed) interest rate cuts are sliding, reflecting a shift in market sentiment as inflation risks resurface. Traders in recent days have abandoned hopes of an early summer easing from the central bank, a change in thinking that coincided with the U.S.-Israel attacks on Iran and a burst in oil prices to around $100 a barrel.
  • Before the conflict, the market anticipation had been for a quarter percentage point rate reduction in June 2026, likely another one in September 2026, and an outside chance of even three, depending on how the economics played out, according to the CME Group’s FedWatch calculations, highlighting how expectations for policy easing were previously stronger.
  • Much of the thinking behind that approach was that a softening labour market, moderating inflation and a new dovish chair coming on board in May 2026 would push the Fed into an easing posture. However, at least as long as the Iran drama plays out, the expectations now are that fighting inflation will remain paramount.
  • A higher inflation path will make it harder for the Fed to start cutting soon, and as such, Goldman Sachs officially adjusted its rate forecast, pushing back the next cut to September from June, though it still thinks the Fed could lower once more before the end of 2026.
  • Additionally, traders in the fed funds futures market have taken even a September cut off the table and now see only one coming, in December, according to the CME gauge, with no additional cuts priced in until well into 2027 or even into the early part of 2028, despite expectations surrounding the arrival of a new Fed chair.
  • The Fed will get another look at inflation data when the Commerce Department releases the personal consumption expenditures price index data for January 2026, while the rate-setting Federal Open Market Committee issues its next rate decision on March 18, 2026, and traders are assigning a nearly 100% probability to the committee staying on hold.

(Source: CNBC)