Oil prices breaking through $100, the market expects the Federal Reserve to cut interest rates only once this year.

With the rise in energy prices and escalating inflation concerns, market expectations for the Federal Reserve to cut interest rates are significantly cooling. Traders have mostly abandoned their expectations for an early rate cut this summer. Before the outbreak of the conflict in the Middle East, the market generally expected the Federal Reserve to cut rates by 25 basis points in June and possibly again in September, and even implement three rate cuts within the year if economic conditions permit. This expectation was based on factors such as the gradual cooling of the job market, a decrease in inflation, and the upcoming appointment of a new Federal Reserve chairman. According to data from the CME FedWatch tool, the market at the time widely believed that monetary policy would gradually shift towards easing. However, with the escalation of tensions in the Middle East pushing up oil prices, market expectations have changed significantly. Investors generally believe that in the context of energy prices potentially further fueling inflation, the Federal Reserve will still prioritize controlling inflation in the short term. Economists at Goldman Sachs stated in a report released on Wednesday, "A higher inflation path will make it more difficult for the Federal Reserve to cut rates in the short term." The institution has pushed back its prediction for the next rate cut from June to September, but still expects the Federal Reserve to cut rates at least once by the end of 2026. Goldman also pointed out that if the job market weakens faster and more significantly than expected, the Federal Reserve may still cut rates early. "If the labor market deteriorates significantly, we believe that the impact of rising oil prices on inflation expectations will not be an obstacle to an early rate cut." However, some market participants are more cautious. According to the latest pricing in the federal funds rate futures market, traders have basically ruled out the possibility of a rate cut in September and only expect one rate cut in December. At the same time, expectations for further rate cuts have been pushed back to 2027 or even early 2028. This expectation contrasts with the upcoming changes in the leadership of the Federal Reserve. Current chairman Powell will step down in May this year, with his successor Warsh expected to be more inclined to actively push for rate cuts. The prospects for future rate cuts still largely depend on the development of the situation in the Middle East. If tensions in the region ease, energy prices fall, and the market may resume its expectations for a more accommodative policy. However, President Trump continues to pressure the Federal Reserve to cut rates quickly. After Brent crude oil prices exceeded $100 per barrel, Trump once again criticized Powell on his social platform, saying he should cut rates immediately, rather than waiting for the next policy meeting. Another focus of the market is the upcoming inflation data. The US Department of Commerce will release the Personal Consumption Expenditure Price Index (PCE) on Friday. Economists surveyed by Dow Jones expect that the core PCE inflation rate, excluding food and energy, may rise to 3.1%. If the data meets expectations, not only will it rise by 0.1 percentage points from December last year, but it also means that inflation is further away from the Federal Reserve's 2% target. This also indicates that inflation pressures were already present in the United States before the outbreak of the conflict in Iran. Stephen Juneau, an economist at Bank of America, pointed out in a report that although some key inflation components (especially housing costs) are showing signs of stabilization, overall inflation remains at a high level and has not fallen into the range consistent with the 2% core PCE target. Juneau said, "The conclusion is that the Federal Reserve is not necessary to rush to further ease monetary policy." The Federal Open Market Committee (FOMC), responsible for setting interest rate policy, will announce its next rate decision on March 18. According to market pricing, traders expect that this meeting will almost certainly keep interest rates unchanged.