Fed’s Rate Path Clouded by Geopolitical Tensions

• Date: March 24, 2026
• BNY’s John Velis noted that the March FOMC meeting met expectations with no changes to the federal funds rate and limited forward guidance. This stability, however, contrasts with market reactions that have shifted towards a more hawkish stance.
• As of March 24, prior to the U.S. market opening, implied expectations from the OIS curve indicated nearly 18 basis points of tightening by year-end, a significant shift from expectations of 60 basis points in cuts noted on February 27, a day before the onset of the Middle East conflict.
• Velis emphasized that the ongoing geopolitical tensions and rising energy prices complicate the Fed’s rate path, leading to heightened uncertainty. He stated, “We feel at a loss to assign meaningful, high-conviction probabilities to any plausible scenario.”
• The market is currently reacting to a potential U.S. military standdown, which has contributed to volatility.

The Fed’s decision to maintain interest rates comes at a time of heightened geopolitical risks, notably the conflict in the Middle East, which has implications for global energy prices and inflation. The Fed’s focus on domestic economic indicators, such as inflation and employment, is challenged by these external factors. The rising energy prices could exacerbate inflationary pressures, potentially forcing the Fed to reconsider its stance on rate cuts. The interplay between these geopolitical tensions and domestic economic conditions is critical as the Fed navigates its monetary policy.

• Spot Moves: The USD has shown resilience, with the DXY index reflecting a slight increase, indicative of its status as a safe haven during geopolitical uncertainties. As of the latest data, the DXY was trading around 99.00, up from lower levels earlier in the month.
• Yield Movements: U.S. Treasury yields have experienced fluctuations, with the 10-year yield reflecting market sentiment about future rate hikes. Investors are weighing the implications of rising inflation against the backdrop of potential economic slowdown.
• Futures/Derivatives: Implied odds for future rate changes have shifted significantly, with markets now pricing in a potential rate hike by year-end rather than cuts, reflecting the changing economic landscape.

• Transmission Channels: The Fed’s current stance and the geopolitical landscape are influencing risk appetite and trade flows. A stronger USD is likely as investors seek safety amidst uncertainty.
• Scenarios:
• Base Case: If inflation continues to rise due to geopolitical tensions, the Fed may be compelled to adopt a more hawkish stance, supporting further USD strength.
• Upside Scenario: Should geopolitical tensions ease, and inflation stabilize, the Fed may signal a return to a more accommodative policy, potentially weakening the USD.
• Downside Scenario: Prolonged conflict leading to significant economic disruptions could force the Fed to reconsider its rate path, which may lead to a weaker USD as markets adjust to a potential recessionary environment.
• Key Levels: Resistance for the DXY is seen at 100.00, while support is around 97.85. For EUR/USD, key levels are 1.10 (support) and 1.12 (resistance).
• Spillovers: The impact of these developments could also affect commodities, particularly oil, which has seen price increases due to supply concerns stemming from the Middle East conflict.

• Geopolitical Risks: Escalation in the Middle East could lead to significant disruptions in oil supply, impacting inflation and the Fed’s policy decisions.
• Economic Data: Upcoming releases, such as U.S. employment figures and inflation data, could significantly influence market sentiment and the Fed’s future actions.
• Contradictory Rhetoric: Diverging statements from Fed officials regarding the outlook for rates could create further market volatility.

• FOMC Meetings: The next FOMC meeting scheduled for mid-April could provide insights into the Fed’s evolving stance on interest rates amidst changing economic conditions.
• Economic Data Releases: Key data points, including the Consumer Price Index (CPI) and Non-Farm Payrolls (NFP), will be critical in shaping market expectations for the Fed’s policy trajectory.

Medium. The analysis is based on a combination of sources, with consistent themes regarding the Fed’s policy stance and the impact of geopolitical tensions on market dynamics. However, the uncertainty surrounding future rate decisions and geopolitical developments limits the confidence level.