Iran conflict raises inflation risks; markets dial back bets on 2026 Fed cuts

Market pricing is increasingly discounting Federal Reserve rate cuts in 2026 as inflation risks tied to the Iran conflict mount. Derivatives markets imply a 3.6% chance of a rate cut at the June 2026 meeting, while the probability of rates staying unchanged in July 2026 stands at 88.5%, based on interpretations of the Fed's June and July meeting outcomes. The Fed has cautioned that a prolonged conflict could fuel inflation and, if sustained, raise the risk of stagflation. A blockade of the Strait of Hormuz has sharply disrupted global oil flows, lifting Brent crude above $126 a barrel. Separate market indicators show rising tail-risk expectations, with the implied likelihood of WTI reaching $150 per barrel by May 2026 increasing. The International Monetary Fund has revised its 2026 outlook, cutting global growth by 0.2 percentage points and lifting its inflation forecast by 0.6 percentage points. The Fed has projected that if the war continues, inflation could climb to 5.4%–6%, complicating the path for monetary policy. Supply concerns have intensified following recent attacks on Iran's energy infrastructure, adding to upward pressure on crude prices and reinforcing expectations that easing in 2026 is less likely. What markets are watching: developments in the Iran conflict, including ceasefire talks or further military escalation; upcoming Fed communication on inflation and rates; U.S.-Iran geopolitical negotiations; U.S. Energy Information Administration supply updates; and conditions around the Strait of Hormuz.