Markets reacted swiftly after news that the U.S. and Iran had agreed to a two-week cease-fire, with investors increasing the odds that the Federal Reserve will cut interest rates by December.
Data from CME Group showed the probability of at least one Fed rate cut by December jumping to 43% from 14% just one day earlier. The shift follows a broader repricing of policy expectations since the outbreak of the war, when traders had moved from anticipating multiple cuts to even pricing in a possible rate increase.
A rate hike is now fully priced out, though investors have not reverted to the prewar scenario of several reductions. Markets remain cautious: uncertainty over whether the cease-fire will hold is high, and a full clearing of the disruption in global oil and gas markets could take months after the Strait of Hormuz reopens. Elevated energy prices could continue to push inflation higher in the months ahead.
“For some time now, we have argued that the Fed might consider cutting if the u-rate moves above 4.5%,” BofA economist Stephen Juneau wrote in a note to clients last week. “The question is whether that level has shifted higher, given the inflation risks from the Iran conflict. We still think a urate above 4.5% would make the Fed uncomfortable, especially given that the job openings and hiring rates moved down in the Feb JOLTS report.”
The cease-fire came after diplomatic efforts led by Pakistan and arrived hours before President Donald Trump's threatened deadline. The temporary reprieve provides space for the two countries to try to negotiate a longer agreement to end the six-week war.
Energy and precious-metals markets reflected the diplomatic shift. Oil prices moved back below $100 per barrel following the cease-fire announcement, though they remain elevated compared with prewar levels of roughly $70 per barrel. Gold prices rose, with futures also climbing as investors weighed safety and inflation hedging needs.
Fixed-income markets tightened as yield levels fell in response to higher odds of policy easing. Traders cited expectations that oil prices could decline further, reducing the chance that energy-driven inflation will trigger more aggressive policy from the Fed.
Implications
- Rising odds of a year-end Fed cut have immediate effects on bond yields and risk asset pricing.
- Energy markets will remain central to inflation dynamics until supply routes and logistics fully normalize.
- Labour-market metrics, including the Feb JOLTS report, are a reference point for how comfortable the Fed may feel about moving on policy.