Odds for interest-rate cut in 2026 triple amid Iran war uncertainty

• Rate cut probability jumped from 14% to 43% in one day after the cease-fire announcement, though traders have not returned to earlier projections of multiple cuts due to uncertainty
• Fed officials noted the Iran conflict could necessitate lower rates if it causes further labor market softening or reduces household purchasing power through higher oil prices
• Iran's blockade of the Strait of Hormuz has caused the worst-ever energy supply disruption, with economists warning higher energy costs could reheat inflation and prevent rate cuts

Summary

Federal Reserve officials maintained their projection for one interest-rate cut in 2026 at their March 17-18 meeting, despite escalating uncertainty from the Iran conflict. Minutes released Wednesday revealed that most policymakers acknowledged the war could necessitate lower rates, emphasizing the need to remain "nimble" while monitoring impacts on inflation and employment.

Key Developments:

• Odds of at least one rate cut by December 2026 surged to 43% on Wednesday, up dramatically from 14% the previous day, according to CME FedWatch
• The spike followed President Trump's announcement of a two-week cease-fire with Iran, conditional on reopening the Strait of Hormuz
• Iran's blockade of the strait has caused severe energy supply disruptions, threatening to reignite inflation

Economic Concerns:

The Fed noted that "substantially higher oil prices could reduce households' purchasing power, tighten financial conditions, and reduce growth abroad." Inflation remains stubbornly above the Fed's 2% target, while the labor market showed minimal job creation last year.

Market Implications:

Investor sentiment has shifted multiple times this year. Early 2026 projections anticipated multiple rate cuts, but the Iran conflict reversed expectations, with traders even pricing in potential rate hikes. Despite the cease-fire announcement, traders remain cautious about returning to expectations for multiple cuts due to substantial uncertainty around the agreement's durability.

Fed Chair Jerome Powell and other officials indicated rate cuts could become appropriate if inflation declines as expected or if labor market conditions soften further. However, ongoing geopolitical risks and energy market volatility continue to complicate the rate outlook.