A trader works on the floor of the New York Stock Exchange (NYSE) on March 18, 2026, in New York City, USA, as Federal Reserve Chairman Jerome Powell’s press conference after the Fed’s interest rate announcement is broadcast on a screen.
Brendan McDiarmid | Reuters
Traders are eyeing the possibility of a rate cut by the end of the year after the US and Iran agreed to a ceasefire.
The probability of a rate cut rose sharply on Wednesday morning to about 43%, according to CME Group’s FedWatch tool, which uses 30-day federal funds futures contracts to calculate market expectations for Fed moves.
Market prices suggest the overnight borrowing benchmark rate will be 3.5% in December, compared to the current effective level of 3.64%.
Before the announcement, the market’s odds of a rate cut were just 14%.
Traders had expected the Fed to be hesitant to cut interest rates this year because the Iran conflict has sent energy prices soaring and threatened the central bank’s efforts to return inflation to its 2% target. Markets had previously expected multiple layoffs this year to shore up the sluggish labor market.
With peace at least in Iran fragile, sentiment has begun to tilt toward a potential rate cut.
“Markets are currently discounting the Fed’s apparent bias towards one rate cut this year,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a note. “Assuming a flawed deal is likely, an impending inflation shock is much less likely to threaten inflation expectations, and this repricing needs to go further.”
Guha sees the rate cuts as having an impact on the Fed’s global peers, including the Bank of England, the European Central Bank and the Bank of Japan.
In the US, markets will receive data this week that will provide two views on inflation.
The Commerce Department will on Thursday release the Federal Reserve’s recommended consumer spending price index, which measures inflation in February before the Middle East war. And on Friday, the Bureau of Labor Statistics will release its consumer price index for March, which will reflect the impact of the hostilities on prices.
Economists expect headline inflation in the PCE report to be 3%, with core inflation excluding food and energy at 2.8%, according to the Dow Jones Consensus. For the CPI, the respective March readings were pegged at 3.3% and 2.7%, with the all-item level reflecting the increase in energy prices due to the war.
Guha stressed that the chances for a lasting peace with Iran remain in flux and said he expected policymakers to take a generally cautious stance in the coming months.
“Then, if the information coming in is encouraging, we could potentially see a return to a more dovish stance after the end of the summer, with room for one, perhaps two rate cuts before the end of the year.”
