Expectations of an early interest rate cut by the Federal Reserve weakened sharply after oil prices surged in the wake of US-Israeli air strikes on Iran.
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Reserve would resume interest rate cuts before September eroded
further on Tuesday, as rising oil prices from the U.S.-Israeli
air war against Iran heightened concern that inflation pressures
would keep the central bank in a hawkish posture.
Interest rate futures and Treasury securities saw fierce
selling for a second straight day after the launch of air
strikes against Tehran over the weekend that killed the
country’s long-time leader. With the crucial Strait of Hormuz
closed to traffic and the flow of 20% of the world’s crude oil
effectively shut off for an indeterminate time, U.S. oil prices
have surged by more than 13% since Friday.
While the U.S. economy is far less sensitive to oil than it
was during the 1970s oil price shocks, it nevertheless poses a
risk to headline inflation through higher energy prices. Indeed,
retail gasoline prices jumped 10 cents a gallon in the last 24
hours, according to AAA, with prospects high for more increases
in the near term.
The rate futures selloff knocked down to around 35% the
prospects for a Fed rate cut in June when Kevin Warsh –
President Donald Trump’s nominee to succeed Fed Chair Jerome
Powell – would lead a policy-setting meeting for the first time.
Moreover, traders currently see only a 55% chance of a cut by
July, down from more than 70% in recent days.
The perceived chance of further easing beyond an initial cut
is dropping as well, with rate traders pricing in only about a
56% chance of a second rate cut by December.
Published on March 3, 2026