Ceasefire shifts Fed rate cut odds, but oil’s 30% premium keeps cuts uncertain

Traders now assign a one-in-four chance of a U.S. interest rate cut by year-end — a shift from before the Iran conflict ceasefire, when markets priced in some likelihood of a Fed rate hike. The change reflects easing fears of inflation reigniting due to Middle East tensions, particularly as a two-week ceasefire raises hopes for the reopening of the Strait of Hormuz to shipping. Yet oil prices remain about 30% above prewar levels, sustaining inflationary pressure and leaving the Fed in a bind. A temporary spike in inflation would not prompt a policy shift, officials say, but a longer-lasting war and persistently high prices could force a choice between holding rates high to control inflation or cutting to cushion the economy. Fed policymakers may consider cuts later this year if inflation concerns subside, but minutes from the March meeting show some officials remain open to rate hikes should inflation stay elevated. San Francisco Fed President Mary Daly said it is too early to assess the conflict’s full economic impact, as recent Israeli airstrikes on Lebanon and an Iranian strike on a Saudi oil pipeline underscore the fragility of the truce. Before the ceasefire, traders had priced in a rising chance of a rate hike; immediately after, expectations jumped to a 65% probability of a cut. That has since retreated. Evercore ISI’s Krishna Guha argues the market should instead price in closer to one full rate cut by year-end. The shift in central bank expectations has been more pronounced abroad, with traders scaling back bets on multiple rate hikes by the European Central Bank and the Bank of England.