Iran War Forces Fed Hawks to Scrap Rate Cuts: Traders See Zero Easing in 2026

Federal Reserve officials are hitting the brakes on rate cuts. The Iran War, erupting in late February, has spiked oil prices and revived inflation fears. Early-year bets for multiple reductions now look fanciful. Traders price in zero cuts for 2026. The Fed’s consensus clings to one. But even doves are wavering.

Governor Christopher Waller laid it out bluntly on April 17. “The first was the start of the conflict with Iran, which quickly disrupted energy production and transportation in the Middle East and sent global energy prices soaring,” he said in a speech at Auburn University, per the Federal Reserve. The war likely drives up near-term inflation. Yet policymakers stand ready to ease later if peace arrives swiftly. “Here, abstracting from the effects of tariffs and energy, I see a forecast in which underlying inflation would continue to move toward 2 percent, leaving me cautious about rate cuts now and more inclined toward cuts to support the labor market later this year when the outlook is more steady,” Waller added.

And that’s from a centrist voice. Governor Stephen Miran, once the most aggressive dove, has dialed back. He slashed his projection from four cuts to three, as reported by Yahoo Finance on April 18. On April 16, he told the Washington Economic Festival the inflation picture had deteriorated even before the war. “The energy developments have…increased the risks of higher inflation further out if the energy crisis remains in place for a long period of time or gets worse,” Miran said, per Yahoo Finance. Now he ponders just three—or maybe fewer.

New York Fed President John Williams echoed the caution. A Powell ally, he backs the “wait-and-see” stance amid risks to the dual mandate of stable prices and maximum employment. “This has begun to play out already,” Williams warned on April 16 about prices rising as growth slows, quoted in Yahoo Finance from a Wall Street Journal report.

Geopolitical Shock Reshapes Monetary Path

The federal funds rate sits at 3.50%-3.75%. Unchanged after the last two FOMC meetings. Traders, via CME FedWatch, see no cuts this year. Peace talks offer hope. But oil disruptions linger. Tariffs add pressure. Inflation hovers above 2%. Labor force growth stalls near zero monthly hires needed just to tread water, Waller noted.

President Trump piles on. He’s hammered Chair Jerome Powell as a “moron” for not slashing to 1% or below. Demands echo through his second term. Yet Fed independence holds—for now. The FOMC votes later this month. Expectations: hold steady.

Markets whipsaw. Bonds rallied briefly on cut hopes. Stocks dipped on oil fears. But reality bites. A protracted war could slow growth, hit jobs. Most officials would then cut, per recent minutes. A minority eyes hikes if prices stick. Two-sided risks. No preset course.

Waller framed the bind: high inflation plus weak jobs equals tough choices. Maintain rates if inflation threats dominate. Energy shocks aren’t new. But layered on sticky services and goods prices, they complicate the path back to target.

Miran still favors cuts to juice the labor market. Energy hits demand more than supply long-term, he argues. Yet even he admits risks if crisis drags. Inflation composition worsened pre-war—other sectors heating up.

Williams sees supply snarls easing if conflict resolves soon. But dual mandate pulls both ways. Stagflation whispers. Prices up. Growth down. Already emerging.

Markets and Mandates in Tension

Traders dumped early cut bets as oil soared. Now, with Strait of Hormuz reopening and prices dipping, some reprice for December easing. But officials resist. Consensus: one cut max. Miran at three. Waller: later, if steady.

Broader context. 2025 saw three cuts amid cooling jobs. 2026 dawned optimistic. War flipped the script. Tariffs from Trump policies linger. Fiscal expansion fuels deficits, bond yields.

Fed dots from March penciled one cut. Minutes reveal split: war hurts jobs (cut), boosts prices (hike). No rush. Data-dependent.

Wall Street adjusts. Wells Fargo nixes 2026 cuts. Citi delays. ISM services prices at 13-year highs. Payrolls beat at 178,000—solid, but no dovish trigger.

X chatter reflects divide. Fed watcher Joseph Wang noted minutes: most cut on oil shock for jobs; minority hikes on inflation. ZeroHedge highlighted two-sided language.

For insiders, the pivot matters. Neutral rate may rise with AI productivity, per Governor Bowman. Higher for longer baseline. War tests resolve.

FOMC April 28-29 looms. Projections update soon. If peace holds, one cut viable. Prolonged fight? Steady—or tighter. Labor softens? Door cracks open.

No easy outs. Fed navigates war, politics, prices. Rate cuts? Not yet. Maybe later. Or never this year.