US and Iran Take a Back Seat as Markets and the Fed Clash on Rates
By:Ilya Spivak
Against all odds, the Federal Reserve remains in focus in the week ahead after last week’s seemingly uneventful policy announcement. The markets were on tenterhooks after the US struck nuclear sites in Iran, wading directly into the fight after Israel began striking the Islamic Republic last week.
Tehran responded with a volley of strikes against US military bases in the Middle East. Reports suggest the attacks were telegraphed ahead of time to limit casualties, making them appear as a face-saving exercise rather than escalation. US President Trump signaled he will not seek to retaliate, allowing Iran an offramp.
Crude oil prices gapped higher at the weekly trading open following news of the US strike, then cratered as markets appeared to sniff out a path to de-escalation. The WTI benchmark is trading down over 8% intraday, making for the biggest one-day loss since September 2022.
The spotlight now turns to Fed Chair Jerome Powell as he sits for two days of semi-annual testimony. He is due to appear at the House of Representatives on Tuesday and deliver a repeat performance in the Senate on Wednesday this week. Prepared remarks ought to mostly match from one day to the next, with unique Q&A sessions to follow.
Last week, the Fed’s policy-steering Federal Open Market Committee (FOMC) kept its interest rate target unchanged, matching widely held expectations. Officials revised down their expectations for economic growth while marking higher the outlook for inflation, as anticipated.
On the path of interest rates, the FOMC maintained its call for 50 basis points (bps) in rate cuts for 2025. Next year’s median projection was reduced from 3.4% to 3.6%, implying a downgrade from two cuts to just one. That makes for a widening departure from what the markets have priced in.
Benchmark Fed Funds futures price in 53bps in cuts this year and 63bps in 2026. This puts the markets firmly on the dovish side of the central bank. As much is echoed in the bond market, where priced-in inflation expectations tracked by so-called “breakeven rates” have pointed lower in recent weeks.
If Mr. Powell manages to convince the markets that it is them that are off base, the US dollar may rise against its major counterparts while Treasury bonds push higher at the long end of the yield curve, reflecting the pushing of rate cuts further out along the timeline. Gold prices may weaken. The implications for stock markets seem clouded.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts #Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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