This week, the Federal Reserve and the European Central Bank will have to address many new questions, but they are unlikely to offer investors any definitive guidance. Following the rise in oil prices linked to the conflict in Iran, the potential impact on monetary policy has already been felt in the markets.
In the United States, expectations for rate cuts have been scaled back: markets had priced in about 60 basis points of easing by the end of February, while today they estimate about 20 basis points in total, a shift that suggests investors are beginning to question the Fed’s ability to continue ignoring a series of supply shocks. It is now almost certain that on Wednesday Jerome Powell will confirm the current monetary policy stance.
In Europe, too, the energy shock has altered rate expectations. The market is pricing in two ECB rate hikes in 2026, while the three-month Euribor has risen to 2.157% and the six-month Euribor to 2.522%, about 30 basis points higher than at the start of the month.
Fed: Wait-and-See Approach and Stagflation Risk
Forecasts for the Fed, however, remain oriented toward a first easing move, albeit further out in time. The first cut currently priced in by the markets is expected at the year’s final meeting in December, with a probability close to 65%. The rise in energy costs could therefore reduce the urgency to cut rates, but without generating expectations of the opposite direction for now.
“Powell is expected to acknowledge the risks of stagflation but reiterate the wait-and-see approach. It will be interesting to see if he attempts to correct the market narrative that higher oil prices are automatically a signal of tighter monetary policy,” commented analysts at Bank of America.
The new macroeconomic projections expected on Wednesday are not expected to be significantly altered. Estimates point to an upward revision of inflation—with the PCE Index projected at 2.8% in 2026—and a slight upward revision of growth for this year, amounting to +0.1 percentage points. The dot plot, which summarizes Fed members’ expectations for future rates, is also expected to remain unchanged at 3.375% by year-end, indicating only one cut from current levels.
According to Bank of America, however, the impact of the Iranian crisis could evolve over time. A temporary oil shock would have a “hawkish” effect, with more persistent inflation, while a crude oil price consistently above $100 per barrel could produce a more “dovish” effect, because demand would eventually weaken and energy inflation would prove temporary. In this scenario, analysts note, “the Fed could aggressively cut rates after the inflation peak.”
According to François Rimeu, senior strategist at Crédit Mutuel Asset Management, “Jerome Powell will emphasize that any easing will require clear evidence of a sustained decline in inflation toward 2%, while remaining ready to act should the labor market deteriorate.” At the same time, he adds, the Fed should tolerate temporary price pressures linked to the energy shock: “cost increases due to supply shocks, which are typically transitory, do not justify a monetary policy response as long as inflation expectations remain well anchored.”
This caution also reflects the nature of the current shock. As Michał Jóźwiak, market analyst at Ebury, notes, “the Federal Reserve remains virtually the only major central bank from which the market still expects rate cuts this year, thanks in part to the United States’ status as a net oil exporter.” However, the analyst adds, “geopolitical tensions could delay the path of rate cuts, reinforcing the idea of a cut only in the second half of the year”.
ECB: Energy Shock Weighs Heavier
For the Eurozone, the effects of rising energy costs risk having a stronger impact on inflation and the economy—a message that markets have already factored into expectations of further rate hikes throughout 2026.
At Thursday’s press conference, analysts at Goldman Sachs explain, “we expect President Christine Lagarde to emphasize that monetary policy is not in a ‘fixed position’ and that the Governing Council is well-equipped to respond to the evolving shock,” while also noting the greater capacity of the European economy to absorb shocks compared to 2022.
The conflict in Iran has, in fact, altered the risk landscape for European monetary policy. “Before the outbreak of war in Iran, the ECB was in a sort of ‘sweet spot,’ with rates considered adequate to keep inflation under control,” Jóźwiak notes. “But the conflict has shifted the balance of risks toward a more stagflationary direction, especially since the Eurozone is one of the areas most vulnerable to energy shocks.”
The ECB staff’s new projections are expected to include a downward revision of growth by 0.1 percentage points in both 2026 and 2027, to 1.1% and 1.3%, respectively, while this year’s inflation could be revised upward by three-tenths of a percentage point, to 2.2%.
An adverse scenario linked to the situation in the Strait of Hormuz—whose closure to maritime traffic has sent oil prices soaring past $100 per barrel—could also fuel the debate on upside risks to inflation and on the possible rate hikes needed to prevent a decoupling of long-term expectations.
According to analysts, some of the more hawkish members of the Governing Council have already begun to openly discuss the possibility of further rate hikes. “Some ECB officials, such as Nagel and Kazimir, have spoken quite directly about the possibility of a rate hike at one of the upcoming meetings,” notes Jóźwiak, a factor that has contributed to heightened tension in European money markets.
