Construction work continues at the Marriner S. Eccles Federal Reserve building in Washington, DC, on Dec. 30, 2025.
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Update: Fed votes to hold rates steady, notes ‘uncertain’ impacts from Iran war
A hotter-than-expected wholesale inflation reading for February had traders contemplating the possibility that the Federal Reserve won’t be lowering interest rates at all this year.
Following a Bureau of Labor Statistics report that the producer price index posted its biggest gain in a year, futures markets took any realistic chance of a cut off the table until at least December.
Even then, odds of a reduction at the final Fed meeting of the year fell to about 60% as persistently higher inflation — brought on by tariffs, the Iran war and elevated services costs — will keep the central bank on hold. The PPI report came just hours before the Federal Open Market Committee was to release its latest interest rate decision.
The wholesale inflation reading “likely reinforces a hold decision by the Federal Reserve later today but tilts the risk toward a more hawkish tone in today’s FOMC” statement, said Eugenio Aleman, chief economist at Raymond James. “Even if rates are left unchanged and we see multiple dissents, the messaging may lean toward ‘higher for longer,’ especially with energy inflation set to re-enter the picture in coming months.”
Before the war that began Feb. 28, traders had been looking for interest rate cuts in both June and September, with an outside possibility of one more in December as the Fed sought to balance its dual mandate of stable prices and low unemployment.
But odds for a June cut have now slumped to just 18.4%, July is down to 31.5% and September to 43.6%, according to the CME’s FedWatch tool, which calculates probabilities using 30-day fed funds futures contracts.
Low conviction
Chances for a December reduction were at 60.5%, indicating that traders are leaning toward a cut, though with a relatively low level of conviction. Historically, the 60% level or above has been associated with Fed moves in either direction.
Futures are implying a 3.43% fed funds rate by the end of 2026, compared with the current level of 3.64%.
To be sure, trading in fed funds futures is volatile, and the Fed could be pushed back into an easing stance if the labor market weakens further. Fed Governors Stephen Miran and Christopher Waller have been advocating for immediate cuts, though the rest of the committee seems more inclined to hold rates where they are until the economic picture clears.
Correction: The Iran war began Feb. 28. A previous version misstated the country’s name.