What the market is pricing for Fed and global central-bank interest rates after the cease-fire

By Jamie Chisholm

Chair Jerome Powell and the Fed may feel a lesser need to raise interest rates as oil prices fall from their recent peaks.

The two-week cease-fire agreed between the U.S. and Iran has left investors less worried that major central banks will raise borrowing costs this year.

Oil prices had surged to multiyear highs in recent weeks after Tehran all but closed the Strait of Hormuz in response to the attack by Israel and the U.S. on Feb. 28 - a spike in energy costs that traders feared would stoke inflationary pressures and could cause the Federal Reserve and its peers to hike interest rates.

However, the news late Tuesday that the halt in hostilities will include a reopening of the strait has caused crude prices to plunge, with Brent oil June futures (BRN00) down 13.5% to $94.50 a barrel and the West Texas Intermediate futures contract for May (CL.1) sliding 14% to $96.45 a barrel.

Markets have consequently priced in reduced chances that the Fed will raise its funds rate by the end of 2026, according to CME FedWatch. At the start of the week traders were seeing an 11.7% chance the Fed would raise rates by 25 basis points to a range of 3.75% to 4%. By early Wednesday that probability had fallen to just 0.8%.

Markets still see little chance of a Fed rate cut this year.

Still, investors have responded by moving back into bonds - fixed-income assets that become less attractive as inflation accelerates - forcing Treasury yields sharply lower.

The 10-year Treasury yield BX:TMUBMUSD10Y, which is more sensitive to inflation, is down 6 basis points to 4.240%, while the 2-year yield BX:TMUBMUSD02Y, which is more sensitive to monetary policy, is falling 7.5 basis points to 3.723%. Both are the lowest yields in around three weeks.

Evidence of of how much the recent surge in energy costs has impacted broader price pressures will be provided on Friday, when the U.S. consumer-price index for March will be published. The Fed's favored inflation measure, the PCE, or personal consumption expenditure, price index, will be released on Thursday, but that covers February, and so won't capture most of the oil-price rise.

"Assuming a flawed deal likely will be reached, this repricing has more to go, with the looming inflation shock now much less likely to threaten inflation expectations," said Krishna Guha, vice chairman of Evercore ISI.

"With conditions much less likely to pressure the Fed to hike this year, we think the market should be pricing in closer to one full cut in the U.S., he added.

Inflation in Europe tends to be impacted more by energy costs, and consequently expectations have turned from possible rate cuts to rate rises since oil and gas prices surged after the war with Iran began.

However, the region's bond yields were also falling markedly on Wednesday, as traders noted not just the dive in the price of Brent but also a 17% fall in the Dutch TTF Natural Gas May 2026 contract (TTFCK26), the continent's natural-gas benchmark.

This has helped 10-year German bund yields BX:TMBMKDE-10Y to plunge 16.4 basis points to 2.992%, as traders pare back bets on the extent of European Central Bank rate rises this year. Still, markets are pricing in a 95% chance that the ECB 's main rate will have risen from 2% to 2.5% by the end of December, according to LSEG data.

"Government bonds are rallying as inflation worries fade and markets begin to abandon bets on further central-bank rate hikes," said Kallum Pickering, chief economist at Peel Hunt.

Similarly, Britain's 10-year gilt yield BX:TMBMKGB-10Y was dipping 19 basis points to 4.645% as traders trimmed bets on the number of 25-basis-point rate increases by the Bank of England.

"There is now just over one hike expected from the BOE, down from nearly four at the peak of the conflict," said Kathleen Brooks, research director at XTB. "If this cease-fire leads to a lasting peace, then the inflationary impact could be lower, and we could start to see rate cuts being priced back in for the BOE in the coming months."

In Japan, meanwhile, traders are almost exactly split on whether the Bank of Japan will lift interest rates at its April 28 meeting. According to LSEG data, there's a 91% chance of two hikes by the end of the year. The yield on the 30-year Japanese government bond BX:TMBMKJP-30Y fell 15 basis points to 3.60%.

However, some analysts warned that, even if the cease-fire held, the economic impact of the conflict is unlikely to fade quickly.

"Damage to infrastructure, higher shipping and insurance costs, and structural shifts in energy pricing mean the shock will likely have a long tail, feeding through to inflation, growth and corporate earnings over the coming months," said Daniela Hathorn, senior market analyst at Capital.com. "In that sense, while the ceasefire has improved the near-term outlook, the broader macro implications of the crisis are still unfolding."

-Jamie Chisholm

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04-08-26 0935ET