The Iran war has done what months of sticky inflation data couldn’t: it has almost completely erased the market’s remaining expectations for Fed easing.
The FOMC is overwhelmingly expected to leave rates unchanged tomorrow, with market pricing near 100% for no move. But the real story is further out the curve. Traders are now pricing just 4 basis points of easing, compared with roughly 60 bps before the war. That is a major shift in the Fed narrative and it leaves Powell with little incentive to lean dovish at what is likely his final meeting as Fed chair.
Assuming Kevin Warsh is confirmed, this should be Powell’s last time leading the FOMC decision and press conference. Senator Thom Tillis has said he will support Warsh’s confirmation, which makes the transition look increasingly certain. There is still one open question: whether Powell stays on as a Fed governor after his chair term ends. He can do so, but whether he wants to remain inside a Warsh-led Fed is unclear and we don’t know if we will get the answer on Wednesday.
That matters because Powell is unlikely to tie his successor’s hands. There is no obvious benefit in offering strong forward guidance on cuts, particularly with oil at $100 and the economic data holding up better than feared. Powell’s best course is to preserve flexibility: acknowledge the improved data, note the inflation risks from energy, stress data dependence and leave the next Fed chair with a clean slate.
The latest Fed forecasts are still the anchor for the discussion. In March, the median FOMC projection showed real GDP growth of 2.4% in 2026, unemployment at 4.4%, headline PCE inflation at 2.7%, core PCE inflation at 2.8%, and one 25 bps cut pencilled in for the year. That was a cautious easing path even before the oil shock. Since then, the growth data have generally been better, the labour market has not broken, and financial conditions have not tightened enough to create urgency. We won’t get new forecasts today.
The problem is inflation. A rise in WTI to $100 is not the same as a demand-driven overheating cycle, but the Fed cannot simply ignore it. Energy shocks hit consumers quickly and visibly. They lift gasoline prices, squeeze real incomes and can bleed into inflation expectations if they last long enough. The Fed will likely treat the first-round effect as something to look through, but Powell cannot credibly dismiss the risk of second-round effects.
That leaves the Fed in a familiar but uncomfortable place. Growth is better, but potentially vulnerable. Inflation is still above target, and now exposed to an oil shock. The labour market is cooling, but not enough to force the Fed’s hand and the most-recent jobs data has ticked higher. Under those conditions, the bias is patience and that’s been the chorus from Fed officials.
For markets, the statement is unlikely to change much. The key will be Powell’s tone in the press conference. If he emphasizes downside growth risks or suggests the oil shock is likely to be temporary, yields could fall and the dollar could soften. But that would be a surprise. More likely, he says the Fed is monitoring both sides of the mandate, that inflation remains too high, and that policy is well-positioned while officials assess incoming data.
A hawkish surprise would come if Powell puts more emphasis on inflation expectations or suggests that higher energy prices could delay any easing. A dovish surprise would require him to keep the door open to cuts despite the oil shock. The base case is neither because he will want to give Warsh flexibility to set his own agenda.
The most likely outcome is no rate move, no strong signal on the next move and no attempt to shape the Warsh Fed before it begins. Powell and the rest of the Fed can afford to wait
