The Fed Funds futures market assigns a 98.9% probability that rates will remain in the 3.50% – 3.75% range for a third consecutive meeting. The focus will not be on the decision itself, but on the projections and Powell’s tone, which will shape the path of monetary policy in the coming months.
Financial conditions remain loose despite recent tightening
The market is anticipating that the Iran conflict will generate more inflation and make it harder for the Fed to cut interest rates: currently, Fed Funds futures price in a single 25 basis point cut in 2026, expected in September.
At the same time, longer-dated government bond yields have risen by around 25 basis points since the start of the conflict, in the context of higher deficits and rising funding costs. However, demand remains strong – as reflected in the latest 20-year auction – and although credit spreads and volatility (VIX, MOVE) have increased, there are no signs of elevated stress. Overall, financing conditions remain accommodative.
Will Powell keep a low profile? The impact of oil on the dot plot
This backdrop leaves the Fed in a comfortable position to keep rates unchanged. Powell has room to adopt a more hawkish tone, but he is likely to maintain a cautious, data-dependent approach, avoiding premature reactions to market noise.
