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Home/Markets & Investing/FED INTEREST RATE DECISION

Middle East Conflict Erases Market Expectations for Federal Reserve Rate Cuts

ER

Emerson Rutherford

Fed interest rate decision · Apr 11, 2026

Middle East Conflict Erases Market Expectations for Federal Reserve Rate Cuts

Source: The Digital Ledger Data Terminal

Traders' expectations for Federal Reserve rate cuts this year have nearly vanished. The shift follows a six-week-long conflict in the Middle East that triggered an oil price shock, driving inflation to its largest monthly increase since 2022 and pushing nationwide gasoline prices above $4 per gallon.

Related Brief2d ago
monetary policy

Middle East Conflict Uncertainty Keeps Federal Reserve Rates Steady

Households' purchasing power is reduced when oil prices rise substantially. This reduction in purchasing power, alongside tightened financial conditions and reduced growth abroad, is the downstream consequence of the Middle East conflict. The Federal Reserve Open Market Committee (FOMC) held its benchmark overnight interest rate steady on March 17-18 amid elevated inflation and lackluster job gains. Officials expressed concern that the conflict in the Middle East, then in its third week, was an additional source of uncertainty. Participants noted that a prolonged conflict would lead to more persistent increases in energy prices, which would then pass through to the Fed's core inflation measure. Officials also noted that the conflict had weakened investor confidence, as evidenced by declines in U.S. equities. A protracted conflict could weigh on business sentiment and and result in a further softening in labor market conditions. This impact on the jobs outlook is cited as a potential reason for rate cuts later in the year.

Wall Street strategists have raised inflation forecasts and postponed the timeline for interest rate cuts. Alexandra Wilson-Elizondo, Global Co-Head of Goldman Sachs Asset Management, expects the Federal Reserve to maintain a stance of 'clearly staying on hold' until growth and inflation directions become clearer.

Related Brief2d ago
commodities

Gold holds steady as inflation data looms and Middle East tensions cloud rate outlook

Gold prices stabilized near $4,721.51 per ounce on Thursday as investors weighed conflicting signals from inflation expectations and geopolitical risk, with a key U.S. inflation report looming. The fragile U.S.-Iran ceasefire and Israel’s heavy strikes on Lebanon — which killed hundreds and triggered retaliation threats — have kept safe-haven demand in play, but rising energy prices are feeding inflation fears that undercut gold’s appeal. Since the conflict began on February 28, spot gold has fallen more than 10%, pressured by a re-pricing of interest rate expectations. The Federal Reserve’s March meeting minutes revealed that more policymakers saw potential need for rate hikes as inflation continues to run above the 2% target. With U.S. Personal Consumption Expenditures data due at 1230 GMT, markets are poised for clues on whether the Fed will maintain restrictive policy or pivot toward cuts. Higher rates typically hurt non-yielding assets like gold, even as Middle East supply disruptions lift oil prices and inflation. While GoldSilver Central’s Brian Lan expects gold to consolidate between $4,607 and $4,860, Standard Chartered forecasts a recovery in coming months as geopolitical risk remains elevated.

The shift in expectations has moved into the bond market. The two-year U.S. Treasury yield has risen nearly 50 basis points to around 3.8% since the outbreak of the war. Wilson-Elizondo noted that the credit cycle appears to be turning, creating increasing pressure for corporate credit to undergo repricing.

Related Brief2d ago
foreign exchange

US Dollar Index Erases Annual Gains as Middle East Ceasefire Reprices Energy Risk

The US Dollar Index dropped 1.2% on Wednesday, erasing all of its year-to-date gains. The euro, pound sterling, and yen each rose more than 1% against the dollar during trading. The decline was driven by a two-week ceasefire announced between the US and Iran, which caused Brent crude oil futures to plummet 16%. This retreat in energy prices reduced the US dollar's status as a safe-haven asset and prompted leveraged investors to unwind long dollar positions. The drop in oil prices also reignited market expectations for Federal Reserve interest rate cuts, with current pricing indicating a 33% probability of one rate cut within the year. The US dollar rebounded 0.6% from its daily low after Iran suspended tanker passage through the Strait of Hormuz on the 8th.

Fed interest rate decision

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