As both energy prices and inflation fears pop, expectations for Federal Reserve interest rate cuts are sliding.
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.
Prior to the conflict, the market anticipation had been for a quarter percentage point rate reduction in June, likely another one in September, and an outside chance of even three depending on how the economics played out, according to the CME Group's FedWatch calculations.
Much of the thinking behind that approach was that a softening labor market, moderating inflation and a new dovish chair coming on board in May would push the Fed into an easing posture. But 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," Goldman Sachs economists said in a Wednesday note.
The firm officially adjusted its rate forecast pushing back the next cut to September from June. However, Goldman's economists still think the Fed could lower once more before the end of 2026.
"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," they wrote.
An elusive second cut
Other market players aren't so sure.
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.
There are no additional cuts priced in until well into 2027 or even into the early part of 2028, despite the presence of presumptive new Chair Kevin Warsh, picked by President Donald Trump ostensibly for a willingness to ease aggressively. Current Chair Jerome Powell leaves the position in May.
Whether that outlook holds up likely will depend on how things play out in the Middle East. Should the situation improve, it could reinstall a sense of normalcy to the markets and renew hopes for more easing.
Even with Brent crude settling above $100, Trump again called on Powell to cut.
"Where is the Federal Reserve Chairman, Jerome "Too Late" Powell, today? He should be dropping Interest Rates, IMMEDIATELY, not waiting for the next meeting!" Trump posted on Truth Social.
The Fed will get another look at inflation data Friday morning when the Commerce Department releases the personal consumption expenditures price index data for January. Economists surveyed by Dow Jones expect core PCE, a key focus for Fed officials, to show an increase to 3.1% on the annual inflation rate.
A reading like that would represent a 0.1 percentage point gain from December as well as a step further away from the Fed's 2% goal. It also would indicate that inflation pressures were percolating well ahead of the Iran strike and might well give officials even further pause about the prospects for lower rates.
Bank of America economist Stephen Juneau said in a note that while some important components — housing, in particular — are showing signs of stabilizing or receding, inflation otherwise "has been rangebound and remains above levels consistent with 2% core PCE."
"The upshot is that the Fed should not be in a rush to ease rates further," Juneau said.
The rate-setting Federal Open Market Committee issues its next rate decision March 18. Traders are assigning a nearly 100% probability to the committee staying on hold.
Facts Only
Traders have abandoned expectations of a Federal Reserve interest rate cut in early summer.
The shift in expectations coincided with U.S.-Israel attacks on Iran and a rise in oil prices to around $100 per barrel.
Prior to the conflict, markets anticipated a quarter-point rate cut in June, another in September, and a possible third cut.
Factors influencing earlier easing expectations included a softening labor market, moderating inflation, and a new Fed chair assumed to be dovish.
Goldman Sachs adjusted its forecast, delaying the next rate cut from June to September but still expecting another cut by 2026.
Fed funds futures traders now expect only one rate cut in December, with no additional cuts priced in until 2027 or early 2028.
Current Fed Chair Jerome Powell will leave in May, with Kevin Warsh, appointed by President Trump, set to replace him.
Former President Trump called for immediate rate cuts, criticizing Powell for waiting.
The Commerce Department will release January PCE inflation data on Friday, with core PCE expected to rise to 3.1% annually.
A 3.1% core PCE reading would move further from the Fed’s 2% inflation target.
The Federal Open Market Committee’s next rate decision is on March 18, with traders assigning nearly 100% probability to no change.
Bank of America economist Stephen Juneau noted that while some inflation components are stabilizing, others remain above the 2% target.
Executive Summary
Expectations for Federal Reserve interest rate cuts have shifted significantly due to rising energy prices and geopolitical tensions. Traders had previously anticipated a rate cut in June, followed by potential additional cuts later in the year, driven by expectations of a softening labor market and moderating inflation. However, escalating conflict between the U.S., Israel, and Iran—along with oil prices surging to around $100 per barrel—has led markets to delay or reduce expectations for rate cuts. Goldman Sachs revised its forecast, pushing the first cut to September, though it still anticipates another by 2026. Meanwhile, fed funds futures traders now price in only one cut in December, with no further reductions expected until 2027 or 2028. The Fed’s upcoming PCE inflation data release could further influence these expectations, with economists forecasting a rise to 3.1%, moving further from the Fed’s 2% target. Political pressure, including calls from former President Trump for immediate rate cuts, adds another layer of complexity. The Fed’s next policy decision is scheduled for March 18, with markets almost certain it will hold rates steady.
The situation remains fluid, with Middle East developments and inflation trends as key variables. While some economists argue that persistent inflation justifies caution, others suggest that a weakening labor market could still prompt earlier cuts. The uncertainty underscores the delicate balance the Fed faces between controlling inflation and supporting economic growth.
Full Take
The strongest version of this narrative highlights legitimate economic concerns: geopolitical instability and rising oil prices are disrupting inflation expectations, forcing the Fed to reconsider its rate-cut timeline. The article credibly presents market reactions, institutional forecasts, and political pressures without overt sensationalism. It acknowledges uncertainty—whether Middle East tensions ease or inflation persists—and avoids overstating conclusions.
However, patterns of emotional exploitation and authority games subtly shape the framing. The inclusion of Trump’s Truth Social post, while factually accurate, risks amplifying partisan provocation (ARC-0043 Motte-and-Bailey). The repeated emphasis on "fears" and "drama" leans into fear appeals (ARC-0024 Ambiguity), though not egregiously. The narrative also assumes a direct causal link between oil prices and Fed policy, which, while plausible, oversimplifies the Fed’s multifaceted mandate.
Root cause: The paradigm here is the Fed’s dual mandate—price stability vs. employment—amid external shocks. The unstated assumption is that geopolitical risks inherently delay rate cuts, but history shows the Fed has acted independently of short-term volatility. The deeper implication is a tension between market expectations and central bank autonomy, with human agency (e.g., traders, politicians) attempting to influence outcomes.
Who benefits? Financial institutions and policymakers gain from prolonged uncertainty, as volatility can justify cautious (or aggressive) monetary policy. Who bears costs? Consumers and businesses face higher borrowing costs if cuts are delayed.
Bridge questions: How much of the market’s reaction is driven by genuine economic analysis versus speculative herd behavior? What historical precedents exist for the Fed cutting rates during geopolitical crises? Would a rate cut now risk entrenching inflation, or is the greater risk a recession from over-tightening?
Counterstrike scan: A coordinated influence campaign would weaponize fear (e.g., "Iran drama") and partisan division (e.g., Trump’s attack on Powell) to erode trust in the Fed’s independence. The article includes these elements but does not structurally align with such a playbook—it presents them as contextual factors rather than primary drivers. The content remains within bounds of standard financial reporting.
Patterns detected: ARC-0043 Motte-and-Bailey, ARC-0024 Ambiguity
Sentinel — Human
The article shows strong signs of human authorship, with stylistic quirks, specific attributions, and narrative digressions inconsistent with typical AI generation.