Rising oil prices driven by escalating geopolitical tensions with Iran are undermining expectations of Federal Reserve interest rate cuts in 2026, as inflationary pressures reemerge. The market now prices in a significantly lower probability of any rate reductions this year.
- Crude oil prices reached $97.80 per barrel on February 28, 2026.
- Core inflation remains at 3.7% year-over-year.
- Probability of a Fed rate cut by June 2026 dropped to 28%.
- 10-year Treasury yield rose to 4.32%.
- S&P 500 fell 1.8% over one week.
- Energy stocks rose 5.2% amid higher oil prices.
The prospect of a Federal Reserve rate cut in 2026 is rapidly diminishing, as crude oil prices climbed to $97.80 per barrel on February 28, 2026, up 12% from the prior month amid escalating military posturing between U.S. forces and Iranian-backed militias in the Middle East. This spike in energy costs has reignited concerns over inflation, directly challenging the Fed’s dual mandate of price stability and maximum employment. With core inflation remaining elevated at 3.7% year-over-year, the central bank’s ability to ease monetary policy is now under increasing pressure. The market’s shift in sentiment is reflected in the CME FedWatch Tool, which now indicates only a 28% probability of a rate cut by the June 2026 FOMC meeting—down from 61% at the start of February. Futures pricing now suggests the federal funds rate will remain at its current 5.5% level through the remainder of the year, with no cuts expected before late 2026. This represents a sharp reversal from earlier projections that had priced in two cuts by year-end. The broader financial markets are adjusting accordingly: the S&P 500 fell 1.8% over the week, while Treasury yields rose, with the 10-year note climbing to 4.32%, signaling tighter financial conditions. Sectors sensitive to rising interest rates—such as technology and real estate—experienced notable sell-offs, with the Nasdaq Composite losing 2.4% in two trading sessions. Meanwhile, energy stocks gained 5.2% over the same period, as ExxonMobil (XOM) and Chevron (CVX) reported quarterly earnings above expectations, buoyed by higher oil margins.