The US Federal Reserve is expected to keep interest rates high at 3.50% to 3.75% at least until September. A recent Reuters poll revealed that economists are now more cautious following a 40% surge in crude oil prices triggered by the military conflict between the US-Israel and Iran.
This drastic change in market expectations has occurred in just two weeks. Previously, the majority of analysts had predicted a rate cut in June, but the “energy price shock” from the Middle East has forced 45% of them to postpone that projection until the end of 2026.
The Fed’s main concern is now focused on the Personal Consumption Expenditures (PCE) Index, which is expected to jump to 3.3% in the second quarter. This figure is about 50 basis points higher than the original forecast, indicating that wartime inflation is starting to seep into the overall cost of living for Americans.
In addition to the economic pressures, political factors are also at play. President Donald Trump has repeatedly criticized Jerome Powell and named Kevin Warsh as the next Fed Chair candidate. However, analysts say any Fed Chair will struggle to find consensus on cutting rates as long as oil prices remain volatile due to the blockade of the Strait of Hormuz.
Overall, the market is now starting to prepare for a “higher for longer” scenario. In fact, traders are placing a 30% probability on additional interest rate hikes if inflation continues to soar above the 2% target, a scenario that would further exacerbate the burden of consumer and business debt.
