Markets remain optimistic that Fed will maintain rates in 2026

The Fed is still expected to maintain its interest rates this year as economists remain optimistic despite geopolitical tensions in the Middle East reversing previous estimates of dovish moves.

Global energy supply disruptions due to developments in the Strait of Hormuz reportedly did not fuel inflationary pressures as much as feared, as the release of macroeconomic data eased the likelihood that the Fed would adopt a tight policy moving forward.

The US-Iran conflict reignited, sending oil prices up to the $100-a-barrel level again, and caused concerns over a potential Fed rate hike.

Experts expect the Fed will not raise rates for the rest of the year as the inflationary effects remained limited, with the US’ enforced tariffs having already been factored into prices.

Rogier Quaedvlieg, senior US economist and head of economic modeling at ABN Amro, told Anadolu that renewed tensions around the Strait of Hormuz and the sharp rise in oil prices contributed to the pressure on the Fed but the bank is still expected to maintain rates on Wednesday

“The latest FOMC (Federal Open Market Committee) minutes suggest officials broadly see two possible paths: inflation improves ‘soon,’ allowing rates to remain on hold; or inflation proves stickier, driven by both energy prices and AI-related (artificial intelligence-related) demand pressures, requiring ‘some’ further policy firming,” he said.

Quaedvlieg stated that recent historical data supports the first possible path but the developments in Iran and surging energy prices increased the likelihood of the second scenario.

He noted that a new tariff period came to the fore in addition to the energy shock.

“These tariffs are being implemented under Section 301 and, in our view, rest on far firmer legal foundations than the measures they replace, namely the IEEPA (International Emergency Economic Powers Act) tariffs struck down by the Supreme Court and the expiring Section 122 tariffs,” he said. “On a trade-weighted basis, the overall tariff burden is broadly unchanged from the Section 122 package. As a result, we do not expect a meaningful new inflation impulse.”

“While certain details in the new package may create price pressures for specific goods from certain trading partners, the overall package closely resembles the existing tariff regime. Most of the associated price effects have already been passed through, limiting the scope for an additional inflationary impact,” he added.

Quaedvlieg stated that the Fed will maintain its policy at its July meeting but September may bring a rate hike.

“For rates to stay on hold, tensions around Iran will need to ease materially in weeks rather than months,” he said.

James Knightley, chief international economist at ING, told Anadolu that cooling inflation kept the Fed from adopting hawkish policies, while weak employment data following the bank’s hawkish stance last month eased market expectations for potential rate hikes.

“The Fed is split down the middle on whether they might eventually hike — we are siding with the nine that think they won’t,” he said. “With nine members thinking they will hike and nine members thinking they will hold, the combination of modest job creation and moderating inflation pressures leads us to side with the nine that expect to hold policy steady.”

“As such, we continue to predict stable Fed policy rates through to next summer,” he added.