March 3 - Market participants are dialing back bets that the U.S. Federal Reserve will begin cutting interest rates soon, as a surge in oil prices tied to a widening U.S.-Israeli conflict with Iran raises concerns that energy-driven inflation could complicate the central bank's path.
Crude oil climbed for a third consecutive session after the geopolitical escalation disrupted fuel shipments and amplified fears of further supply interruptions in oil and gas coming from the Middle East. That rally in energy costs has translated into a reassessment of the timing and scale of Fed easing among traders.
Key market probabilities from the CME FedWatch Tool show a notable shift in expectations:
- There is a 30.7% chance that the Fed will deliver at least a 25-basis-point interest-rate cut in June, down from 49.6% a week earlier and from more than 56% a month ago.
- Traders had been expecting June to mark the resumption of Fed rate cuts following the central bank's last reduction in December, but now they place a 47.2% likelihood on a move in July instead.
- By December, markets are pricing in roughly 42 basis points of cumulative policy easing, which implies one 25-basis-point cut this year with a second reduction remaining uncertain.
Analysts have quantified how higher oil could feed through to inflation. Goldman Sachs estimated in a Monday note that a sustained 10% rise in oil prices would lift core consumer prices by 4 basis points and headline CPI by 28 basis points.
Rising oil quotes can quickly translate into higher gasoline and transport costs, which in turn push up prices for a broad set of goods and services. That mechanism is central to why traders and policymakers are watching energy developments closely for their implications on inflation and on the pace of monetary easing.
Minutes from the Fed's January policy meeting reflected a committee that was not unanimous. The record noted that "several" officials said they would be open to raising rates again if inflation stayed elevated, while others were inclined to support additional cuts if inflation moved lower as they anticipated.
Against this backdrop, the U.S. central bank is widely expected to keep policy rates unchanged in March, maintaining a pause after cutting rates three times in 2025.
Summary of market stance: traders have scaled back the probability of a June cut, shifted bets toward July, and now see limited total easing by year-end. The oil price spike and the split within the Fed on the inflation outlook are the primary drivers of that reassessment.