Market expectations for a 2026 Fed rate hike have risen to 45%

Investors are now assigning a roughly 45% chance to the Federal Reserve hiking rates in 2026. This probability has risen from 12% prior to the Iran war. Goldman Sachs disagrees with this shift, maintaining a forecast of two rate cuts in 2026. The firm attributes the market's hawkish pivot to oil supply shocks driven by conflict in the Middle East, but notes the current shock is smaller and narrower than prior shocks that caused inflation problems. A softening labor market and wage growth lower than the Fed's target inflation rate further reduce the likelihood of a rate hike. Current Fed rates are broadly in line with standard policy rules, and financial conditions have tightened since the start of the war in Iran. Goldman Sachs notes that the FOMC's projections on higher oil price scenarios include no change to the policy rate relative to the baseline.