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
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.
