The Iran war has done what months of sticky inflation data couldn’t: it has almost completely erased the market’s remaining expectations for Fed easing.
The Iran war has done what months of sticky inflation data couldn’t: it has almost completely erased the market’s remaining expectations for Fed easing. The FOMC is overwhelmingly expected to leave rates unchanged tomorrow, with market pricing near 100% for no move.
But the real story is further out the curve. Traders are now pricing just 4 basis points of easing, compared with roughly 60 bps before the war. That is a major shift in the Fed narrative and it leaves Powell with little incentive to lean dovish at what is likely his final meeting as Fed chair.
Assuming Kevin Warsh is confirmed, this should be Powell’s last time leading the FOMC decision and press conference. Senator Thom Tillis has said he will support Warsh’s confirmation, which makes the transition look increasingly certain. There is still one open question: whether Powell stays on as a Fed governor after his chair term ends.