Markets hopes for Fed interest rate cuts are rapidly fading away

• Goldman Sachs pushed back its forecast for the next rate cut from June to September 2026, citing a 'higher inflation path' as oil prices surged above $100 per barrel following Iran conflict
• Core PCE inflation is expected to rise to 3.1% in January data, moving further from the Fed's 2% target and indicating inflation pressures existed before the recent Middle East strike
• The Fed's next policy decision on March 18 is nearly 100% certain to keep rates unchanged, despite President Trump calling for immediate rate cuts from outgoing Chair Jerome Powell

Summary: Fed Rate Cut Expectations Diminish Amid Rising Energy Prices and Inflation Concerns

Market expectations for Federal Reserve interest rate cuts have deteriorated sharply as energy prices surge and inflation concerns intensify. Fed funds futures traders now anticipate only one rate cut in December 2026, with no additional reductions priced in until well into 2027 or early 2028.

Key Shift in Expectations:

Just weeks ago, markets anticipated a quarter-point rate cut in June, likely another in September, and possibly a third before year-end. This outlook has been abandoned following recent Middle East conflict that pushed Brent crude oil above $100 per barrel.

Analyst Perspectives:

Goldman Sachs officially revised its forecast, pushing the expected rate cut from June to September. The firm noted that "a higher inflation path will make it harder for the Fed to start cutting soon," though they still project one more cut before end-2026. Bank of America's Stephen Juneau echoed this caution, stating the Fed "should not be in a rush to ease rates further."

Inflation Data:

The Commerce Department is set to release January PCE data Friday, with economists expecting core PCE inflation to rise to 3.1% annually—a 0.1 percentage point increase from December and further from the Fed's 2% target.

Political Pressure:

President Trump publicly called on Fed Chair Jerome Powell to "drop Interest Rates, IMMEDIATELY," though Powell's term ends in May. The market assigns nearly 100% probability that the FOMC will hold rates steady at its March 18 meeting.

The outlook depends heavily on Middle East developments, with potential normalization possibly reviving easing expectations.