Markets hopes for Fed interest rate cuts are rapidly fading away
US Federal Reserve Chairman Jerome Powell reacted at a press conference following the Federal Open Market Committee’s (FOMC) two-day meeting on interest rate policy in Washington, DC, on January 28, 2026.
Jonathan Ernst | Reuters
While both energy prices and inflation fears are increasing, expectations for the Fed’s interest rate cut are decreasing.
Investors have recently abandoned hopes that the central bank would begin quantitative easing in early summer; This was a change in thinking that coincided with US-Israeli attacks on Iran and oil prices soaring to around $100 per barrel.
Before the conflict, market expectations were for a quarter-point rate cut in June, possibly a rate cut in September, and an outside chance of even three, depending on the course of the economy, according to CME Group’s report. FedWatch calculations.
Much of the thinking behind this approach was that a softening labor market, moderate inflation, and a new dovish chair taking office in May would push the Fed into an easing stance. However, at least as long as the Iran drama continues, expectations are that the fight against inflation will continue to be the most important issue.
“A higher inflation path will make it harder for the Fed to start cutting rates soon,” Goldman Sachs economists wrote in a note Wednesday.
The firm officially adjusted its interest rate forecast, postponing the next rate cut from June to September. However, Goldman economists still think the Fed may cut rates once again before the end of 2026.
“If the labor market weakens sooner and more severely than we expect, we do not think concern about the impact of higher oil prices on inflation and inflation expectations will preclude earlier rate cuts.”
A tough second cut.
Other market players are not so sure.
Traders in the Fed funds futures market have even taken a September cut off the table and currently only see a cut coming in December, according to the CME benchmark.
There are no additional cuts priced through 2027 or even early 2028. New President Kevin Warsh, who was apparently chosen by President Donald Trump for his willingness to aggressively unwind. Current Chairman Jerome Powell is leaving office in May.
Whether this outlook will continue will depend on how events develop in the Middle East. If the situation improves, a sense of normalcy may be restored in the markets and hopes for further easing may be renewed.
Even as Brent crude rose above $100, Trump once again called for a cut from Powell.
“Where is Federal Reserve Chairman Jerome “Too Late” Powell today? He must lower interest rates NOW, without waiting for the next meeting!” Trump shared a post on Truth Social.
The Fed will take another look at inflation data on Friday morning when the Commerce Department releases personal consumption expenditures price index data for January. Economists surveyed by Dow Jones expect the core PCE, a key focus of Fed officials, to show an increase of up to 3.1% in the annual inflation rate.
Such a reading would represent a 0.1 percentage point increase from December and also a further step away from the Fed’s 2% target. It could also indicate that inflationary pressures were building well ahead of the Iranian attack, giving officials further hesitancy on lower interest rates.
While some key components (especially housing) have shown signs of stabilization or decline, inflation otherwise “has been intermittent and remains above levels consistent with a 2% core PCE,” Bank of America economist Stephen Juneau said in a note.
“The bottom line is that the Fed should not be in a rush to cut interest rates even further,” Juneau said.
The Federal Open Market Committee, which sets the rate, will issue its next interest rate decision on March 18. Investors rate the probability of the committee remaining pending at almost 100%.
