Hello inflation, goodbye 2026 Fed cut

A Reuters Open Interest newsletter

Hello inflation, goodbye 2026 Fed cut

By Jamie McGeever, Markets Columnist 

Wall Street sank and Treasury yields leaped on Wednesday as traders interpreted a spike in oil, hot U.S. producer prices, and underlying signals from the Federal Reserve - even as the central bank stood pat on policy - as signs that interest rates will not be cut again this year.

In my column today I look at how investors, having just had a sudden oil shock thrust upon them, now face the prospect of a much stronger dollar than they had bargained for at the start of the year. They may have to reassess their 2026 outlooks. 

I'd love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Hawkish wind blows

The Fed left rates on hold as expected, and also maintained its policy rate and unemployment projections. It sees growth picking up a bit and an inflation spike this year. The most notable median projection shift was the long-run fed funds rate, up to 3.1% from 3.0%.

All in all, no major fireworks. But under the hood, the new 'dot plot' shows a notable shift toward fewer projected rate cuts, and one policymaker nodding to a rate hike next year, while Governor Waller withdrew his dissent for a cut this time around. A hawkish wind is blowing. 

* Escalation and underestimation

There's been a tendency, especially in U.S. trading hours, for investors to 'buy the dip' in the expectation that war in the Middle East decelerates, oil supplies re-accelerates, and a sense of normality returns to the global economy and markets. That's looking increasingly optimistic.

There is little evidence that hostilities are cooling, and investors may be underestimating the impact of the energy supply disruption and $100 oil - inflation, consumer spending, wealth effects, financial conditions are all liable to change. Potentially significantly, and not for the better.

* PPIpeline pressures

U.S. producer price inflation figures for February, released on Wednesday, were pretty extraordinary. The annual core rate jumped to 3.9%, the highest in over a year, and the monthly headline rate accelerated for the fourth month in a row. 

Morgan Stanley economists say this raises 3-month annualized core PCE inflation - the Fed's preferred measure - to 4.56%. That's almost a full percentage point higher than the comparable rate in January, and more than double the Fed's 2% target. And remember, all this is pre-oil shock.  

War in the Middle East means investors may not only have to contemplate a higher oil price, but also a stronger dollar than many had bargained for at the start of the year.

The greenback has emerged as one of the clearest "safe-haven" winners since the U.S.-Israeli strike on Iran on February 28 sparked conflict across the region and virtually closed the Strait of Hormuz, choking off nearly a fifth of global oil supplies.

The dollar has ‌outshone all other currencies, including the Swiss franc and Japanese yen , and outperformed other traditional safe havens like Treasuries and gold by a considerable margin. Suddenly, the bearish 2026 consensus for the dollar looks extremely stale.

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