Fed likely to hold rates at 3.50–3.75% despite rising geopolitical and inflation risks
Oil surge to $119.50 and Middle East tensions complicate outlook for rate cuts
Markets scale back expectations to one rate cut in 2026; focus on Powell’s guidance and dot plot
The US Federal Reserve is set to announce its policy outcome later in the day amid heightened geopolitical tensions and volatile global markets. The Federal Open Market Committee (FOMC), which began its meeting on Thursday, is widely expected to keep the federal funds target rate unchanged at 3.50–3.75%.
Policymakers are navigating growing uncertainty following the combined military action by Israel and the US against Iran. The escalation is expected to keep crude oil prices elevated for longer, raising fears of persistent inflationary pressures and a potential global economic slowdown. With its dual mandate of maintaining inflation near the 2% target while ensuring full employment, the Fed now faces an increasingly complex policy environment shaped by rapidly evolving geopolitical risks.
2 March 2026
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The central bank will release its policy statement at 12:30 IST, followed by a press conference by Fed Chair Jerome Powell. Market participants will closely parse both for cues on the future rate trajectory.
According to the CME FedWatch tool, traders are pricing in a 98.9% probability that the Fed will maintain the status quo, with only a marginal 1.1% chance of a 25 basis point hike to 3.75–4.00%. However, expectations have shifted significantly in recent weeks. Prior to the conflict, markets were anticipating two rate cuts totaling 50 basis points this year, supported by signs of a softening labour market and political pressure from the Trump administration to ease policy.
Data from February showed the US economy lost 92,000 jobs, reinforcing expectations of a dovish tilt. At the time, crude prices remained relatively benign. However, the sharp surge in benchmark oil prices to as high as $119.50 per barrel has altered the outlook, fuelling concerns about prolonged cost pressures and recession risks.
Rate futures now indicate expectations of just one 25 basis point cut this calendar year. Adding another layer of uncertainty is Trump’s nomination of Kevin Warsh as the next Fed Chair, set to succeed Powell in May.
Investors will also closely watch the Fed’s Summary of Economic Projections, particularly the ‘dot plot’, which reflects individual policymakers’ interest rate expectations.
