Wall Street delays Fed rate-cut forecasts amid sticky inflation

The Middle East conflict has fundamentally altered the Federal Reserve's near-term policy path. With the Strait of Hormuz effectively closed after Iran rejected peace proposals, global oil supplies face a massive shock. Aramco estimates a 100 million-barrel weekly loss, the largest disruption since World War II. This supply crunch has sent crude climbing and triggered across-the-board inflationThe rate at which prices rise across an economy. expectations to harden, undercutting dovish market narratives.

Goldman Sachs moved its first Fed cut forecast from June 2026 to December 2026 and potentially into March 2027. Bank of America followed suit, citing both jobs resilience and persistent energy-driven inflationThe rate at which prices rise across an economy. as reasons to hold rates steady. The market had been pricing in multiple cuts this year; now, strategists are recalibrating to a "higher for longer" scenario. Even central banks in Europe, the UK, and Japan are adopting a wait-and-see posture on monetary easing.

Energy importers face margin compression across transport, aviation, and manufacturing sectors. Airlines are already squeezed by jet fuel costs; fertilizer and agricultural supply chains face further headwinds. Meanwhile, dollar strength benefits from rate-hold expectations, putting pressure on emerging markets and commodity exporters. Equity markets have oscillated on this uncertainty: tech and growth names prefer lower rates, while energy and defensive sectors benefit from the inflationThe rate at which prices rise across an economy. premium.

The counterargument holds that markets are overestimating durationBond price sensitivity to interest rate changes. risk. Some strategists argue the Hormuz closure may not persist beyond months, and crude prices could reverse faster than consensus expects. Additionally, demand destruction in developed economies could ultimately cool oil faster than supply shocks alone would suggest. The Fed's next move depends heavily on whether energy prices stabilize or continue climbing.