Geopolitical Shockwaves Dampen Hopes for Near-Term Fed Rate Cuts
A sudden escalation in geopolitical tensions has triggered a swift recalibration of market expectations for Federal Reserve monetary policy, pushing back the anticipated timeline for interest rate reductions.
The catalyst was the U.S.-Israel attacks on Iran, which sent oil prices surging toward the $100 per barrel mark. This spike in energy costs has reinvigorated inflation fears, directly challenging the narrative of an imminent dovish turn from the central bank. Just days ago, traders were pricing in a high probability of a quarter-percentage-point rate cut in June, followed by another in September, according to CME Group’s FedWatch tool. That optimism has now evaporated.
The Shifting Policy Landscape
The previous market thesis rested on three pillars: a softening labor market, moderating inflation readings, and the appointment of a new, presumably more dovish Fed chair in May. However, as long as the Middle East conflict sustains elevated oil prices, the Fed’s primary mandate of price stability is expected to take clear precedence.
“A higher inflation path will make it harder for the Fed to start cutting soon,” economists at Goldman Sachs wrote in a research note this week. In response, the firm officially pushed back its forecast for the first rate cut to September from June. Goldman’s team still projects one additional cut before the end of 2026 but added a critical caveat: “If the labor market weakens sooner and more substantially than we expect, we do not think that concern about the impact of higher oil prices on inflation and inflation expectations would be an obstacle to earlier rate cuts.”
This conditional outlook contrasts with the harder-nosed pricing in the futures market. Traders have now effectively taken a September easing off the table, seeing only a single cut possible in December. Furthermore, no additional reductions are priced in until 2027 or even early 2028. This persistent hawkish skew exists despite the impending arrival of presumptive new Chair Kevin Warsh, selected by President Donald Trump with an eye toward more aggressive easing.
Data and Political Pressure
Whether the market’s cautious stance holds will depend heavily on the trajectory of the geopolitical crisis and the incoming inflation data. A de-escalation could restore risk appetite and revive easing bets. Conversely, sustained high energy prices pose a direct threat to the Fed’s 2% inflation target.
Even with Brent crude above $100, former President Trump applied public pressure on the Fed. “Where is the Federal Reserve Chairman, Jerome ‘Too Late’ Powell, today? He should be dropping Interest Rates, IMMEDIATELY,” Trump posted on Truth Social. Powell’s term concludes in May.
The next major data point arrives Friday morning with the January Personal Consumption Expenditures (PCE) price index from the Commerce Department. Economists surveyed by Dow Jones expect the core PCE rate—the Fed’s preferred gauge—to hold at 3.1% annually, a 0.1 percentage point increase from December. Such a reading would mark a step further from the 2% goal and suggest inflation pressures were building even before the latest geopolitical shock, potentially giving Fed officials more reason for caution.
Stephen Juneau, an economist at Bank of America, noted that while some components like housing are stabilizing, inflation broadly “has been rangebound and remains above levels consistent with 2% core PCE.” His conclusion: “The upshot is that the Fed should not be in a rush to ease rates further.”
The rate-setting Federal Open Market Committee (FOMC) will convene next on March 18. The fed funds futures market currently assigns nearly a 100% probability to the committee leaving rates unchanged at that meeting, reflecting a broad consensus that the era of aggressive tightening is on hold, but the era of cutting has been delayed by global events.
Photo: U.S. Federal Reserve Chair Jerome Powell reacts during a press conference following a two-day meeting of the Federal Open Market Committee (FOMC) on interest rate policy, in Washington, D.C., U.S., Jan. 28, 2026. Jonathan Ernst | Reuters
