Less than a month after hopes for a US-Iran ceasefire sparked a strong stock market rally and briefly revived expectations for easier monetary policy, investors are quickly scaling back expectations for Federal Reserve rate cuts in 2026. As of mid-April 2026, futures markets are effectively pricing in no rate cuts for the remainder of the year, with a small but rising chance that the Fed could even raise rates if inflation proves sticky.
According to the CME FedWatch Tool, the probability of the Fed holding rates steady through December 2026 has risen sharply. Meanwhile, the odds of even a single 25-basis-point cut by year-end have slipped below 30% in recent sessions, a significant drop from post-ceasefire highs. Several major Wall Street banks, including Wells Fargo, have already removed rate cuts from their 2026 forecasts, citing persistent inflation and elevated uncertainty.
This is a sharp reversal from earlier in the year, when markets were still pricing in two or even three cuts. The shift reflects growing concern that war-related energy shocks and second-round inflation effects could keep the Fed on hold much longer than expected, even as geopolitical risks have eased somewhat after the ceasefire.
Sticky inflation remains the core issue
The main reason rate-cut expectations are fading is that inflation is still running above the Fed’s 2% target. March 2026 CPI showed headline inflation rising to 3.3% year over year, up from 2.4% in February. The jump was largely driven by a 10.9% monthly surge in energy prices, tied to disruptions in the Strait of Hormuz during the US-Iran conflict.
Even with the ceasefire in place, Brent crude remains elevated around $88–$92 per barrel, and US gasoline prices are still above $4.10 per gallon. Those energy costs are feeding through into broader inflation. Core CPI sits at 3.4%, while core PCE — the Fed’s preferred measure — is around 2.9%, still above target.
The Fed’s March 17–18 meeting minutes, released April 8, show growing sensitivity to these risks. Some policymakers signaled openness to rate hikes if inflation does not ease, especially if oil remains elevated or wage pressures broaden. Others noted that a prolonged conflict could weaken the labor market enough to justify cuts — but with the ceasefire holding, that scenario currently looks less relevant.
Chair Jerome Powell has continued to stress a data-dependent stance, noting that “the temporary nature of recent energy shocks does not yet allow us to declare victory on inflation.” With unemployment steady at 4.1% and wage growth near 3.9%, the labor market remains strong enough that the Fed has little urgency to ease policy.
Market impact: winners and losers emerging
The shift away from rate-cut expectations is already visible across markets.
Bond yields have moved higher, with the 10-year Treasury drifting toward 4.25%–4.30%. That has pressured rate-sensitive sectors like real estate, utilities, and high-growth equities. Mortgage rates have climbed back above 6.8%, adding further strain to an already weak housing market. Small caps, which initially rallied after the ceasefire, have given back gains as “higher for longer” expectations take hold.
On the other hand, financials are benefiting from a steeper yield curve and stronger net interest margins. Energy producers remain supported by elevated oil prices, though volatility persists. Defensive sectors such as consumer staples and healthcare are seeing steady inflows as investors prioritize stability and pricing power.
Equities overall have held up reasonably well, helped by strong corporate earnings — particularly in AI-related companies. The S&P 500 remains near recent highs, with Q1 earnings growth projected around 14%. However, valuation expansion has stalled, meaning future gains are more likely to depend on earnings growth rather than multiple expansion.
Broader economic and global effects
The Fed’s cautious stance is influencing global central banks as well. The European Central Bank and others are also signaling patience amid ongoing energy uncertainty. Meanwhile, emerging markets are under pressure from a stronger US dollar as rate-cut expectations fade.
Domestically, higher fuel and borrowing costs are weighing on sentiment. The University of Michigan consumer sentiment index fell to a record low in early April, reflecting pressure on household budgets from both energy prices and higher financing costs. This could slow consumption growth in the second quarter.
Analysts at J.P. Morgan describe the current environment as “multidimensional polarization”: strong AI-driven investment and productivity growth on one side, and weaker consumer demand alongside persistent inflation risks on the other. In such a backdrop, the Fed is likely to prioritize inflation control over growth support.
Investor implications
With rate cuts fading from view, markets are increasingly adjusting to a higher-for-longer interest rate environment through 2026.
- Focus on quality: Companies with strong balance sheets, stable cash flows, and pricing power are better positioned. AI leaders such as Nvidia, Broadcom, and Micron continue to benefit from secular demand trends and strong free cash flow.
- Energy exposure: Integrated energy companies and midstream infrastructure may offer more stability than higher-risk exploration plays.
- Fixed income strategy: Short-duration bonds, floating-rate instruments, and TIPS become more attractive in a higher-rate, inflation-sensitive environment.
- Diversification: International equities, particularly in Asia, may benefit from relatively lower energy costs. Broad ETFs like the Vanguard Total International Stock ETF provide exposure.
- Avoid excessive leverage: Highly indebted or speculative growth companies remain vulnerable to higher discount rates.
J.P. Morgan remains broadly constructive on equities into 2026, still projecting double-digit returns driven mainly by earnings growth. However, they emphasize that selectivity will matter more than broad market exposure.
Key risks ahead
Several factors could still shift the outlook:
- Ceasefire breakdown: Renewed conflict could spike oil prices and push the Fed further toward tightening rather than easing.
- Inflation trajectory: A faster-than-expected drop in energy prices could reopen the door to rate cuts.
- Labor market weakening: A meaningful rise in unemployment could force the Fed to reconsider easing even with inflation above target.
- Policy shocks: Fiscal or trade policy changes could add new inflationary or growth pressures.
Bottom line
For now, the prevailing view is that the Fed will remain on hold through 2026, keeping the federal funds rate anchored in the 3.5%–3.75% range established in late 2025. That “higher-for-longer” reality is less about surprise and more about persistence: inflation has not yet cooled enough to justify easing, even as growth remains intact.
The ceasefire has reduced geopolitical risk, but it has not delivered the inflation relief needed to bring rate cuts back into view. For investors, the adjustment is less about predicting the next move and more about adapting to a world where patience — from both policymakers and markets — is still required.