Can interest rates still be cut this year?

As the entire market eagerly awaits this week’s Federal Reserve meeting, a ghost no one wants to face once again hovers over Jackson Hole—Middle Eastern conflict. Once more, it has pushed global central banks to the brink of stagflation.

For the fifth consecutive year, whenever Fed officials believe inflation is about to return to the “gentle” 2%, reality hits back hard. From the aftershocks of the pandemic to the Russia-Ukraine conflict, from the comprehensive tariff plans of two years ago to the current turmoil in the Persian Gulf, the fight against inflation seems trapped in an endless cycle.

Now, with war clouds over the Strait of Hormuz, international oil prices have sharply broken through $100 per barrel, and U.S. gasoline prices have risen 18%-25% since late February. The Fed faces not just the easy question of “when to cut rates” from a few months ago but a profound dilemma that could rewrite monetary policy history: Can they still cut rates this year?

1. From “When to Cut” to “Can We Cut”: A Life-and-Death Game of Expectations Management

● Timiraos points out that at this week’s meeting, the core issue among officials has shifted. The question is no longer about the timing of the next rate cut but whether the decision-makers controlling global funding costs can confidently keep market expectations for rate cuts alive.

● This conflict is likely to reinforce the consensus among officials to “maintain rates unchanged.” But more challenging than holding steady is what signals they should send in the coming months. The market is like a hungry baby—feeding it the wrong message could trigger a severe upheaval in global risk assets.

● If you think this is just another routine “the wolf is coming” story, you’re mistaken. This time, the script is layered with high oil prices, high inflation, cracks in the labor market, and the upcoming Fed chair transition—a quadruple buff.

2. Three Major Signals That Could Trigger a Market Nuclear Reaction Tonight

Based on the “mouthpiece” guidance and global forecast platform data, tonight’s meeting is far from a formality. It features three nuclear-level highlights, each capable of triggering a new round of global asset revaluation:

● Signal 1: To cut or not to cut—will the policy statement delete the word “cut”?

In January, some hawkish officials attempted to remove language hinting at a rate cut in the statement but failed. Timiraos analyzes that if this change is made now, it would be the first official acknowledgment that the “easy policy cycle may be over.” This is more than wordplay; it’s a funeral notice for the monetary policy shift.

● Signal 2: The dot plot’s “blood-red transformation.”

This is the most brutal and direct highlight. Last December, 12 of 19 officials expected at least one rate cut this year. But the situation has changed. Just three officials changing their minds would wipe out the median expectation of rate cuts.

Markets have already voted with their feet. According to options prices from the Atlanta Fed, traders’ probability of at least one rate cut by December has plummeted to 47%, down from 74% before the Iran conflict erupted last month. Even more alarming, the probability of rate hikes by year-end has surged from 8% to 35%.

● Signal 3: Powell’s “final dance.”

This could be Powell’s most conflicted press conference as his term nears its end in May. Any policy decisions made this week will become the foundation for his successor. Will he toughen his stance against inflation to leave an “hawkish” legacy? Or will he be vague and pass the tough questions to his successor? Every word will be scrutinized.

3. Polymarket’s “Prophecy”: Traders Bet Real Money on No Rate Cuts

● On the decentralized prediction platform Polymarket, trading contracts related to this Fed decision are already heated. As an alternative data source outside traditional markets, Polymarket’s pricing often captures the “smart money” insights.

● Data shows that as of March 18, traders assign a 99% probability that the Fed will keep rates unchanged, with only about a 1% chance of a 25 basis point cut. The chance of a rate hike is nearly negligible.

● Even more interesting are the predictions for the year. A contract on Polymarket about the number of rate cuts by 2026 shows that the probability of no cuts this year has risen to 23%, while the chance of at least three cuts has fallen from a peak before the conflict to just 12%. This starkly reveals that global traders are rapidly digesting the expectation of “higher for longer” interest rates.

4. The Inflation “Nightmare Cycle”: Is This Time Different?

● Facing oil shocks, traditional central banking textbooks advise “look long-term,” since rising oil prices tend to offset their negative impact on growth and inflation. But that advice assumes the public believes inflation will eventually come down.

● The reality is, Americans have endured five years of inflation above target, with continuous shocks reminding them of rising prices. Trust in the inflation outlook has become a luxury. Minneapolis Fed President Kashkari recently questioned, “Do we really want to do ‘transient inflation 2.0’ again?”

● The Fed’s preferred core PCE inflation accelerated to 3.1% in January, up from 2.6% in April last year. Inflation is not dead; it’s rebounding on the back of geopolitical conflicts.

● Former St. Louis Fed President Bullard was more direct: if it were late last year, he might have planned a rate cut, but now he’s crossed it out. With core inflation above 3% and rising, “you definitely don’t want to commit to a rate cut at this point.”

5. Who Can Reopen the Strait of Hormuz?

Deloitte’s chief economist Pradeep Philip bluntly states: “Central banks can set interest rates, but they cannot reopen the Strait of Hormuz.”

Tonight, regardless of Powell’s wording or the dot plot’s fluctuations, one fact is clear: the global economy’s stagflation risk is being re-priced due to Middle Eastern conflict. For investors, the “buy the dip” narrative of rate cuts is dead. What awaits may be a “purgatory mode” of struggling to survive amid inflation and recession.

The only certainty is that the script of history has never been so similar, and this time, the Fed’s hand is weaker than ever.