Markets shift back towards potential Fed rate cut this year with Iran ceasefire in place

• Market-implied odds for a rate cut jumped from 14% to 43% after the ceasefire, with December rates expected at 3.5% versus current 3.64%
• Key inflation data due this week: PCE (Thursday) showing February pre-war levels at 3% headline/2.8% core, and CPI (Friday) reflecting March war impacts at 3.3%/2.7%
• Evercore ISI analyst notes the ceasefire makes an inflation shock 'much less likely to threaten inflation expectations' and sees potential for one to two cuts later in 2026

Summary

Market expectations for a Federal Reserve rate cut in 2026 have surged following a ceasefire agreement between the U.S. and Iran. Odds of a rate reduction by year-end jumped to approximately 43% Wednesday morning, up sharply from just 14% before the ceasefire announcement, according to CME Group's FedWatch tool.

The market is now pricing in a 3.5% fed funds rate for December, compared to the current effective level of 3.64%. Prior to the ceasefire, traders expected the Fed to hold rates steady as the Iran conflict had driven up energy prices, threatening the central bank's 2% inflation target and complicating earlier expectations for multiple cuts to support the economy.

Key Market Implications:

Krishna Guha of Evercore ISI noted the market is now pricing in "a clear skew to one cut from the Fed this year," with potential for additional repricing if a lasting deal emerges. He also sees rate cuts potentially coming from global central banks including the Bank of England, European Central Bank, and Bank of Japan.

Upcoming Data:

Critical inflation data will be released this week:

• Thursday: PCE price index (February data, pre-conflict) expected at 3% headline, 2.8% core
• Friday: CPI for March expected at 3.3% headline, 2.7% core, reflecting war-induced energy price increases

However, Guha cautioned that prospects for lasting peace remain uncertain, and policymakers will likely remain cautious. He anticipates a potential dovish shift starting late summer, with scope for one or possibly two cuts later in 2026, contingent on reassuring economic data.