The Federal Reserve's anticipated path to interest rate cuts in 2026 has been thrown into doubt, with economists now forecasting a potential pause or even a hike due to inflationary pressures from rising energy costs. The volatility in global energy markets, driven by the conflict with Iran in the Middle East, has complicated the Fed's plans, as higher oil and natural gas prices create new inflationary pressure.
Market expectations have shifted dramatically. According to CME FedWatch data, there is a 99% probability the Fed will keep its policy rate unchanged at 3.5%–3.75% at its March 18 meeting. The probability of no change at the June meeting has surged to 77%, up from just 31% a month ago. Some analysts, like EY-Parthenon Chief Economist Gregory Daco, have revised their baseline scenario to forecast only a single 25 basis point rate cut in December 2026, with the possibility of no cuts at all this year.
Political pressure is mounting from a different direction. US President Donald Trump has publicly called for an emergency rate cut, urging Fed Chair Jerome Powell to act "IMMEDIATELY" and even suggesting a "special meeting." Trump argues that high rates are hurting the economy and increasing the cost of servicing the $39 trillion national debt. He has nominated Kevin Warsh, seen as more dovish, to replace Powell in mid-May.
The Fed faces a fundamental dilemma: cutting rates to support a weakening labor market—which saw 92,000 layoffs in February—could re-accelerate inflation. Conversely, holding rates stable risks further economic slowdown. With the Personal Consumption Expenditures (PCE) index already showing price increases in January, and the full impact of higher energy costs yet to be felt, the central bank's path forward is fraught with uncertainty. Crypto market observers note that the diminished likelihood of rate cuts could mean less downward pressure on crypto asset prices in the short term, as the aggressive easing tailwind fades.
