Fed Rate Cut Bets Surge After US-Iran Ceasefire
Investor expectations for Federal Reserve interest rate cuts increased sharply after the United States and Iran agreed to a two-week ceasefire. The shift reflects improving market sentiment as geopolitical tensions ease.
According to CME Group data, the probability of at least one rate cut by December jumped to 43%, up from just 14% a day earlier.
Market Outlook Shifts Dramatically
Since the start of the conflict, expectations for Fed policy had changed significantly. Markets moved from anticipating multiple rate cuts to briefly pricing in the possibility of a rate hike.
Following the ceasefire, the likelihood of a rate increase has now been fully priced out. However, investors have not yet returned to their pre-conflict outlook of multiple rate cuts.
Inflation Risks and Energy Prices Remain Key
Despite easing tensions, uncertainty around the ceasefire remains high. Analysts warn that restoring stability in global oil and gas markets could take months, particularly as the Strait of Hormuz gradually reopens.
Energy prices remain elevated compared to pre-war levels, which could continue to fuel inflation in the near term.
Labor Market Could Influence Fed Decisions
Bank of America economist Stephen Juneau noted that the Federal Reserve may consider rate cuts if the unemployment rate rises above 4.5%.
However, he also questioned whether that threshold may shift higher due to persistent inflation risks linked to the Iran conflict.
Recent labor market data, including the February JOLTS report, showed declines in job openings and hiring rates, which could support the case for easing monetary policy.
Ceasefire Driven by Diplomatic Efforts
The temporary truce was reached following diplomatic efforts led by Pakistan, just hours before President Donald Trump’s stated deadline. The agreement provides a window for both sides to negotiate a longer-term resolution to the six-week conflict.
Oil, Gold and Yields React
Oil prices dropped below $100 per barrel after the ceasefire announcement, although they remain well above pre-war levels of around $70.
At the same time, gold prices and futures markets moved higher, while bond yields declined as investors increased their expectations for rate cuts.
