The Federal Reserve held interest rates at 3.5-3.75 percent last week for the second consecutive meeting, and the market now prices a 60 percent probability that there will be no cuts at all in 2026 [1]. Some traders are pricing the opposite direction: a 50 percent chance of a rate hike by year-end.

The arithmetic is simple. Oil above $100 per barrel pushes inflation higher. The Fed's updated projections raised its 2026 inflation forecast to 2.7 percent, up from 2.5 percent in December [1]. Core PCE came in at 3.1 percent. The five-year breakeven inflation rate has risen 26 basis points since the conflict began on February 28, signaling that markets expect elevated prices to persist [2].

Meanwhile, the economy is slowing. Q4 2025 GDP was revised down to 0.7 percent from an initial estimate of 1.4 percent [2]. Consumer spending growth fell to 1.6 percent. The word economists are reaching for is stagflation — rising prices with stagnant growth — a condition where the Fed's standard tools work against each other.

Cut rates and inflation accelerates. Raise rates and the economy contracts further. The war premium has trapped the central bank in a corridor with no good exits.

Goldman Sachs pushed its first expected Fed cut from June to September and reduced projected 2026 cuts from three to two [1]. The market is less optimistic than Goldman.

-- HENDRIK VAN DER BERG, Brussels