As recently as a week ago, few market observers had a Fed rate hike on their 2026 bingo card.
In January, when the Federal Open Market Committee held rates steady, the only dissents came from Federal Reserve governors Christopher Waller and Stephen Miran, who each voted for a quarter-point rate reduction. In March, when the FOMC again left rates unchanged, only Miran dissented, again calling for a 0.25% cut.
Following the conclusion of the latest policy meeting on March 18, the quarterly Summary of Economic Projections showed that seven officials on the 19-member FOMC penciled in no rate cuts at all for 2026 on the so-called “dot plot.” But no one called for a rate hike this year.
On March 17, just 0.1% of interest-rate futures traders predicted the Fed would raise rates in April, according to CME FedWatch. As of Tuesday afternoon, that probability surged to 9.3%.
Perhaps more tellingly, 18% of traders now think the benchmark federal funds rate will be at least 25 basis points higher by June, with those odds increasing to 23.3% by July and 34.7% by September.
Just one week ago, about 20% of traders thought the Fed would cut rates by June, with slightly more than half believing a rate cut would be delivered by September.
The war in Iran appears to have completely flipped the monetary script, with the oil shock from the Strait of Hormuz closure causing inflationary aftershocks that have rippled through consumer prices around the globe.
The Federal Reserve Bank of Cleveland’s Inflation Nowcasting tool is now predicting a 3.23% annual personal consumption expenditures inflation reading in March, up from 2.67% in February.
Inflation concerns led Chicago Fed President Austan Goolsbee to tell CNBC on Monday that it is “going to be a tough moment.”
Goolsbee, who cycled off the rate-setting contingent of the FOMC this year, said the “inflation shock” from the Middle East conflict could have a pile-on effect following the inflationary pressures of the Trump administration’s tariff policies imposed in 2025, which are still working their way through the U.S. economy.
“I remained fairly optimistic that by the end of ’26 rates could go down, but I wanted to see proof that we’re back on an inflation headed to 2%,” Goolsbee said, explaining his decision in December to not back the consensus quarter-point cut. “This [war] definitely throws a wrench into the plans. We do need to see progress.”
Waller, expanding on his decision to back off calling for a rate cut in March, told CNBC during a March 20 interview that persistently high oil prices since the start of the war on Feb. 28 have changed his thought process.
“Two weeks ago, when the jobs report came out, and it was negative 92,000 [positions added in February], I thought, ‘That’s it, I’m dissenting, I’m supporting a rate cut,’” Waller said. He added that it looked at the time like the spike in oil prices would be short-lived and that policymakers could “look through” the inflation impacts.
“Since that time, the Strait of Hormuz was closed,” Waller continued. “This is looking like it’s going to be a much more protracted conflict and oil prices are going to stay high for a longer time. So that suggested inflation was more of a concern than I was putting it.”
