For most of 2025, the market consensus was that the Federal Reserve would keep cutting rates. That consensus is now dead.
Goldman Sachs’ Phillip Lee has indicated that bond traders are pricing in roughly a 75% probability that the Fed will actually raise interest rates by the end of 2026. The catalyst: an inflation surge driven by the ongoing conflict in Iran, which has pushed Brent crude oil prices from the low $70s to near $100 per barrel.
How the math changed overnight
Market-implied probability of a rate hike in 2026 has jumped to approximately 45%, up from just 12% before the Iran conflict escalated. The federal funds rate currently sits between 3.5% and 3.75%. Goldman Sachs has revised its own forecast accordingly, pushing its anticipated rate cut timeline out to June and December of 2027. The bank now expects two 25 basis point cuts that would bring the terminal rate to a range of 3% to 3.25%.
Core inflation running around 3%, combined with strong economic indicators, has made the Fed’s job significantly harder.
