Six months ago, markets were pricing in three rate cuts by summer. Now they're pricing in zero—and the shift tells you everything about how fundamentally the inflation calculus has changed since Iranian tensions transformed the Strait of Hormuz from shipping lane into geopolitical flashpoint.
The Reuters survey of economists released today confirms what futures markets have been screaming for weeks: the Federal Reserve will hold the federal funds rate at its current level through year-end, with the plurality of respondents now pushing any meaningful easing into 2027. The median forecast for core PCE inflation—the Fed's preferred measure—has been revised upward for the fourth consecutive month.
The war premium won't quit
The arithmetic is brutal. Energy costs, which had been moderating through late 2025, have reversed course as tanker diversions around the Strait add roughly $8-12 per barrel to delivered crude prices in Atlantic Basin markets. That premium flows through everything: shipping, petrochemicals, fertilizer, food production. BlackRock's warning today about an "energy shock" scenario in tomorrow's May CPI print isn't alarmism—it's acknowledgment that the supply-side pressures driving this inflation cycle are largely immune to monetary policy.
Chair Powell has been careful to distinguish between demand-pull inflation (which rate hikes can address) and supply-push inflation (which they cannot). But the distinction offers cold comfort when headline numbers keep printing hot. The Fed's credibility depends on hitting its 2% target eventually, and "eventually" keeps getting pushed further out.
The soft landing gets harder
What makes this moment particularly treacherous is the labor market's stubborn resilience. Unemployment remains below 4%, wage growth continues to outpace pre-pandemic norms, and consumer spending—while moderating—hasn't collapsed. In normal times, this would be unambiguously good news. In an inflation-fighting context, it means the Fed has less cover to cut rates even if it wanted to.
The result is a policy bind that economists call "higher for longer" but might more accurately be described as "stuck." The Fed can't ease without reigniting inflation expectations; it can't tighten further without risking the recession it has spent three years trying to avoid. So it waits, and markets recalibrate, and the rate-cut thesis that powered equity valuations through early 2026 quietly expires.
Our take
The death of rate-cut expectations isn't a crisis—it's a recognition that the post-pandemic normalization playbook was always contingent on a geopolitical stability that no longer exists. The Fed didn't fail; the world changed. Investors who built portfolios around imminent easing now face a choice: accept that 5% rates are the new baseline, or keep betting on a pivot that the data simply doesn't support. The smart money is adjusting. Everyone else is hoping.
