• Investors maintain expectations for Fed rate cuts later in 2026, despite easing Middle East tensions.
  • LBBW says Iran conflict resolution may reduce pressure for tighter policy, but its base case remains unchanged.
  • Markets price in a cautious path, with a single rate cut expected in 2026 as inflation and labor data evolve.

Steady Expectations

Investors are unlikely to drop expectations for Fed rate hikes in the second half of the year, even as tensions with Iran ease. LBBW notes that while the resolution of the Iran conflict may reduce pressure for tighter policy, its base case remains that US interest rates will stay unchanged over the next 12 months.

“The easing of geopolitical risks removes one potential catalyst for a hawkish shift, but the Fed remains data-dependent,” said a strategist at LBBW, speaking on condition of anonymity. “We still see rates on hold through year-end, with a possible cut later in 2026 if inflation abates.”

Market Pricing

Fed funds futures now imply a single quarter-point cut by December 2026, according to Bloomberg data. This reflects a cautious outlook amid mixed signals on inflation and the labor market. The US yield curve has steepened slightly as long-term bonds price in deeper easing, while front-end rates remain anchored.

“The Iran detour is a positive for risk assets, but it doesn't change the inflation trajectory,” said a fixed-income analyst at a European asset manager. “We need to see sustained evidence of price pressures cooling before the Fed can act.”

Cross-Border Implications

The divergent path between US and European rates continues to influence capital flows. While the Fed holds steady, the European Central Bank faces pressure to cut rates, creating a yield advantage for Treasuries.

“Relative valuations are driving allocation decisions,” said a portfolio manager at a London-based hedge fund. “We’re overweight US duration as a hedge against geopolitical shocks, but a Fed cut could shift that dynamic.”

Correction: An earlier version of this article misstated LBBW's base case. It remains that rates are unchanged for the next 12 months, not that they will hold through 2026.