Prior to the war that began on February 28, traders had been looking for interest rate cuts in both June and September. However, the upcoming Federal Open Market Committee (FOMC) meeting scheduled for tonight has shifted expectations significantly.

Markets are now anticipating that the Federal Reserve will not implement any rate cuts during this meeting. The Fed’s new forecasts will include the Dot Plot, which reflects individual members’ expectations for effective rates. In December, the Fed had indicated a potential for one rate cut in 2026 and another 25 basis point cut in 2027.

Recent economic data has contributed to this shift in sentiment. A hotter-than-expected wholesale inflation reading for February has led traders to reconsider the likelihood of rate cuts this year. The producer price index recorded its largest gain in a year, prompting concerns about inflationary pressures.

As a result, the chances for a June rate cut have slumped to 18.4%, while the likelihood of a December rate cut stands at 60.5%. Current expectations suggest that the Fed will maintain the current federal funds rate of 3.64%.

Eugenio Aleman noted, “Even if rates are left unchanged and we see multiple dissents, the messaging may lean toward ‘higher for longer,’ especially with energy inflation set to re-enter the picture in coming months.” This statement reflects the cautious approach the Fed may take in light of recent inflation trends.

Furthermore, the Fed has been managing its reserves at a monthly pace of US$40 billion, resulting in a net US$130 billion of balance sheet expansion since mid-December. This indicates ongoing efforts to support the economy while navigating inflationary pressures.

Details remain unconfirmed regarding the exact timing of future rate cuts, and the impact of the current economic situation on Fed decisions remains uncertain. Observers will be closely watching the outcomes of tonight’s meeting for any indications of the Fed’s future direction.

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