Did the Iran War Kill Any Chance of a Fed Rate Cut This Year?

Markets began the week trading at all-time highs as the S&P 500 and Nasdaq Composite have been buoyed by a surge in AI stocks, as several events have shown that the boom in the new technology remains healthy.

Turning to this week, investors will focus on corporate earnings with a number of "Magnificent Seven" stocks set to report, and the Federal Open Market Committee meeting, which includes the latest interest rate decision and always gets a lot of attention from investors.

This meeting will likely be Fed Chair Jerome Powell's last, assuming that Kevin Warsh gets approved by the Senate. However, there's another reason that investors should pay attention to the latest announcement. We'll get some insight into how the war in Iran is weighing on interest rate expectations.

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Is there any hope for rate cuts?

The Iran war's impact on the stock market has faded in recent weeks, and the conflict appears to be settling into a stalemate. Currently, the ceasefire that President Trump announced on April 7 is holding, but both sides are attempting to seal off the Strait of Hormuz, meaning the war's effects on energy supply and prices remain.

Against that backdrop, the Fed will decide whether to hold rates steady or change them. Investors widely expect the Fed Funds Rate to remain at 3.5%-3.75%, but the real question is whether the Fed will drop any hints on what it sees down the road.

For now, the war is driving a surge in energy prices as the latest CPI report showed, and it could impact other categories, like food, if the Strait of Hormuz remains blocked. There's also a high level of uncertainty around the war, making it less likely that the Fed will cut rates until there's a resolution and it's clear what the impact on prices will be. Leading up to the meeting, some Fed presidents said rates were likely to remain where they are through at least most of the year.

According to the CME Group FedWatch Tool, there's a 100% chance based on the pricing of Fed Funds futures that rates will hold steady at the Fed decision on Wednesday. Currently, there's a 30% chance of at least one rate cut by the end of the year and a 70% chance rates hold steady.

The Warsh wild card

Fed Chair Powell's term will end in May, and Trump nominee Kevin Warsh is expected to take over, pending Senate approval.

The biggest question about Warsh is whether he will steer the central bank in a more dovish direction, making rate cuts more likely, but it's worth remembering that he's just one of several voting members of the FOMC, so he can't enact a rate cut alone.

Look for commentary from Jerome Powell on Wednesday regarding the Fed's overall viewpoint on rates and the impact of the war, but investors should be prepared for uncertainty around rate cuts this year, both due to the outcome of the Iran war and how Kevin Warsh influences the central bank once he takes the helm.

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