- Markets think the odds of a Fed rate cut by the end of the year doubled after the Iran ceasefire.
- CME's FedWatch tool shows a 30% chance of lower rates in 2026, compared to just 14% a day earlier.
- Citi sees three rate cuts this year, while other economists are wary of the dovish shift in pricing.
Federal Reserve rate cuts are back on the table with markets repricing the odds of lower interest rates in 2026 after the US, Israel, and Iran agreed to a ceasefire.
The probability of the Fed cutting interest rates by the end of 2026 jumped on Wednesday compared to the odds markets were pricing in on Tuesday. The US and Iran reached a two-week ceasefire agreement late on Tuesday in the hours leading up to Trump's 8 p.m. ET deadline. Wall Street rejoiced, with oil plunging and stocks surging.
Markets see a more than 30% chance of rates easing by year-end, compared to roughly 14% odds a day earlier, according to the CME FedWatch tool.
Investors went into 2026 expecting the US central bank to lower rates throughout the year, but those expectations took a hawkish turn as the historic oil shock driven by the war in Iran fueled renewed inflationary concerns.
Citi says that if the US-Iran deal holds up, the market could quickly shift toward expecting more rate cuts again.
"Fed cuts could be rapidly priced back in should the de-escalation prove durable," Citi analysts wrote.
"Any weakness in labor market data together with benign core inflation could have markets implying more cuts. We continue to expect 75bp of cuts this year in September, October and December," they added.
The Fed is in what KPMG chief economist Diane Swonk called "a bind" because the economic constraints of the war on the supply side are limiting the central bank's ability to address the issue.
RSM chief economist Joe Brusuelas also called the war-driven oil shock a "nightmare" for the Fed.
Ed Yardeni, President of Yardeni Research, said that in order for the Fed to look through the energy price shock and view the associated inflation pressures as transitory, long-term inflation expectations must be well anchored.
Fed Chair Jerome Powell said that inflation expectations are indeed anchored, despite shocks weighing on the near term outlook.
Eric Diton, The Wealth Alliance's president and managing director, indicated the market may be getting ahead of itself by pricing in rate cuts as a knee-jerk reaction to the ceasefire.
"While this is a positive development, we believe it is way too early to celebrate the end of this war, nor make any conclusions about Fed policy," Diton told Business Insider.
"Certainly, if the war ends and the Strait of Hormuz reopens fully, that should reduce energy prices and inflationary expectations, which would give the Fed more leeway in its path of lower rates," he added.
The deal clearly eased investors' worries enough to fuel a relief rally on Wall Street, but the reality of the agreement appears more complicated than investors might want to admit.
US Vice President JD Vance described the agreement as a "fragile truce." By midday on Wednesday, Iranian media reported that Iran had halted passage through the Strait of Hormuz again as Israeli attacks on Lebanon continued.
Diton noted that Israel has had several ceasefires in Gaza, but the agreements have done little to end the conflict in the long term. "It is possible that we may look back at this ceasefire in much the same way."
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