How Many Fed Rate Cuts Can We Now Expect in 2026?

How everything can change in an instant! Just one month ago, the futures market was pricing in two quarter-percentage-point interest rate cuts by the Federal Reserve by the end of 2026. And, according to futures pricing, there was a growing possibility that the Fed might cut three times, as I wrote back on Feb. 21.

Today, however, the futures market sees a nearly 80% chance (78.2% to be exact) that the Fed won't make any cuts to its target interest rate this year. A month ago, futures traders put the chances that the Fed would not cut at all this year at just 5.3%.

And Bloomberg is reporting that bond traders are no longer pricing in any Fed rate cuts this year, either. You can see that by how yields on two-year Treasuries -- which are extremely sensitive to expectations for Fed policy -- are moving. The two-year yield is suddenly trading above the effective Fed funds rate, suggesting the bond market sees no near-term Fed cuts.

The Middle East war has rendered the future outlook opaque

Why such a huge swing in expectations about Fed cuts? Basically, it's due to the war in Iran and its impact on oil prices (Brent crude is now about 50% higher than it was just before the war began). The Fed and other central banks need some clarity about where the economy is going when they set monetary policy. Right now, they have none.

Asked about the impact of the oil shock on the economy and the outlook for interest rates, Powell basically threw up his hands in frustration. "The thing I really want to emphasize is that nobody knows," he said in the press conference that followed the release of the latest policy statement on Wednesday. "The economics effect could be bigger, they could be smaller, they could be much smaller or much bigger. We just don't know."

Image source: Getty Images.

If bond and futures markets are correct, and the Fed does sit on its hands the rest of the year instead of lowering interest rates, it will be a disappointment for investors.

If you're not familiar with the well-known phrase, "Don't fight the Fed," it's basically an acknowledgement that when the Fed is lowering rates, investors can and should assume it will push the market higher -- and they should invest accordingly.

As recently as a month ago, it looked like the stock market would enjoy a robust rate-cut tailwind in 2026. Unfortunately, the war has eliminated that expectation.

The Motley Fool has a disclosure policy.