There may not be a rate cut this year

A gas station price sign is the quickest way for the average American to understand inflation.

In March, the average U.S. retail gasoline price broke $4 per gallon for the first time in nearly four years, and everyone knew it was because of the war.

And a few days ago, the failed talks between the U.S. and Iran mean we will continue to feel the impact of the war, including something crucial for liquidity: there may not be a rate cut this year.

Could a War Roll Back Inflation to 2022?

On February 28, the U.S. and Israel jointly launched a military strike against Iran. This is a timeline that redefines the economic trajectory of the U.S. for 2026.

Brent crude oil, which was around $70 per barrel before the conflict erupted, surged to around $118 per barrel by the end of March. Since then, oil prices have retreated somewhat but still remain elevated around $96 per barrel. The price of oil has risen by over 50%, with Iran blocking the Strait of Hormuz for shipping, through which about one-fifth of global oil supply passes. Even during the negotiation process, the blockade has largely remained in place.

This is not just an oil price issue. The gasoline price index accounts for almost three-quarters of the month's CPI increase, with a month-on-month increase of 21.2% and a year-on-year increase of 18.9%. Every time you fill up, every bill, is punishing the average American family in a specific and granular way. Starting last week, the average U.S. retail gasoline price broke $4 per gallon for the first time in nearly four years.

The energy shock is still spreading throughout the entire economy.

Rising diesel prices are driving up food transportation costs; fertilizer, also a key export transported through the Strait of Hormuz, may see increased costs for farmers and consumers due to the disrupted supply chain. CPI data shows that food prices have risen by 2.7% year-on-year.

It's not just food. Amazon will impose a 3.5% fuel and logistics surcharge on third-party sellers in the U.S. and Canada, and courier companies such as UPS and FedEx have also raised fuel surcharges since the Iran conflict erupted. The tentacles of inflation have reached into every corner.

Based on the correlation calculation of year-on-year oil price changes and the U.S. CPI inflation rate from 2020 to 2025, if the Brent oil price remains between $85 and $100 per barrel in 2026, the year-on-year oil price increase will be around 30% to 50%, potentially continuing to raise the U.S. CPI inflation rate by 1 to 2 percentage points.

And this is just the beginning. Even if a ceasefire continues, considering the difficulty of quickly repairing damaged energy infrastructure and disrupted supply chains, while oil prices may have fallen from their peak, they may remain above pre-conflict levels in the medium term, exerting upward pressure on year-on-year CPI for several months.

Kepplinger's Ryan, a macroeconomist, stated that the partial inflation effect brought by energy prices may take several months to transmit to the consumer end through the supply chain, with the impact potentially being "very widespread."

A war pushed U.S. inflation back from 2.4% in February to 3.3%, meaning a 0.9% month-on-month increase in the CPI for March, the "largest monthly increase since June 2022."

(Note by BlockBeats: In June 2022, due to the Russia-Ukraine war, COVID-19, and the slow response of the Federal Reserve, the year-on-year CPI surged to 9.1%, the highest level since 1981.)

The Rate Cut Door, Halfway Closed

Before the war, the market assumed the Trump administration had a carefully designed political script:

Trump formally nominated former Fed Governor Kevin Warsh as the next Fed chair. Powell's era came to an end. The market quickly began to assess and interpret: a new chair takes office, and the rate cut path is clear. After Warsh's nomination, most market futures traders set the expectation for two rate cuts this year.

There is a fairly clear political interpretation of this personnel arrangement from the outside world. Wilkes, Director of U.S. Economic Research at Bloomberg Economics Research, said that no matter who is finally nominated, when taking office, there will be external doubts. People will believe that he must have promised to carry out the U.S. president's instructions at the Fed, the first and most important of which is to push hard for a substantial cut in the federal funds rate regardless of the inflation consequences.

Therefore, in almost all economic analyses and macro judgments at the beginning of the year, the actual easing pace of the Fed's monetary policy in 2026 may be faster than the market expected, with 2 to 3 rate cuts throughout the year, totaling 50 to 75 basis points.

But after the war, the data changed dramatically, and the situation was not so optimistic.

Currently, Polymarket gives a 44% probability of no rate cuts throughout 2026, while before the war, the probability of no rate cuts for the full year was only 4%. However, since the start of the war, the probability of no rate cuts this year has been steadily increasing, with the market's probability of no rate cuts remaining the highest since the end of March. In addition, the probability of a single 25 basis point rate cut is 26%. Another prediction platform, Kalshi, sets the probability of a no rate cut scenario at 38.5%, and the trading volumes on these markets reflect real-money bets.

The previously released minutes of the Federal Reserve's FOMC meeting on March 17-18 showed that most officials were concerned that the war could damage the labor market, necessitating a rate cut; at the same time, many policymakers emphasized the risk of inflation, which could ultimately require a rate hike. The Fed's March meeting kept the interest rate unchanged in the range of 3.5% to 3.75%.

One set of minutes contained both the possibility of a rate cut and a rate hike. This may also be one of the most awkward situations in Fed history.

The sustained strength of inflation has led some economists to believe that the Fed will not cut rates this year. Pricing in federal funds rate futures indicates that the probability of standing still for the year remains above 70%.

Chris Zaccarelli of Northlight Asset Management pointed out that the duration of the war and the condition of the Strait of Hormuz are crucial. If the supply shock is temporary, the economy can withstand it, and the Fed also has the opportunity to cut rates within the year. But if the inflation shock is more persistent, they can only stand still for the whole year.

Gregory Daco, Chief Economist at Oxford Economics, cautiously predicts that looking ahead to the fourth quarter of 2026 and the end of the year, there may be factors driving the Fed to ease monetary policy, but it will be for the wrong reasons. He also raised a realistic possibility: the Fed's next move may be a rate hike.

This is no longer a matter of "a rate cut a few months late." This is a policy crisis where the script has been completely disrupted.

The Situation for the Republican Party is Quite Grim

Trump's governing logic has always been highly pragmatic. Rate cuts have never been just monetary policy; it is one of the pillars of Trump's political agenda.

The reasoning is not complicated. Rate cuts lower borrowing costs, stimulate consumption, boost the stock market, and make people feel like they are making money more easily. And this feeling will be reflected in the ballots. With the reality pressure of the upcoming midterm elections at the end of the year, as of the time of writing, Polymarket data shows that the probability of the Democratic Party winning the House of Representatives in the midterm elections is as high as 86%, and the probability of winning the Senate has reversed from a pre-war disadvantage of 36% to an advantage of 56%.

The situation for the Republican Party is already quite grim.

Left is the House of Representatives, right is the Senate

The issue is that the political fundamentals of the midterms were largely set by June. From now, the time window is very short.

In order to focus on preparing for the upcoming midterms, Trump needs to quickly de-escalate conflicts to stabilize the capital markets and secure achievements.

Otherwise, the inflation caused by rising oil prices will eventually manifest significantly in the U.S. economy, affecting U.S. consumer spending, which would be a blow to Trump's midterm election and his approval ratings.

This is why Trump is so urgently seeking negotiations with Iran.

Iran's Use of Delaying Tactics

And Iran sees this very clearly.

The negotiations that began in Islamabad on April 10 collapsed just two days later. On April 12, U.S. Vice President Pence announced in Islamabad that the negotiations broke down due to the Iran nuclear weapons issue, and the U.S. delegation left Pakistan to return to Washington.

The failure of the negotiations was not unexpected.

The gap in conditions between the two sides was already on the table before the talks. According to analysis, U.S. demands included: Iran must unconditionally open the Strait of Hormuz, stop all nuclear activities, limit the number and types of Iranian missiles, ensure that no missile can reach Israel in the future, and cut off all ties with proxies. Iran, on the other hand, made equally high demands to the U.S.: requiring total withdrawal of U.S. troops from the entire Middle East, cessation of all U.S. and Israeli war actions in the Middle East, lifting of all economic sanctions against Iran in the past 47 years, and war reparations from the U.S. to Iran.

These are not two similar proposals. These are demands from two parallel universes.

And some U.S. think tanks believe that Iran may choose a "prolonged game" and use the midterm elections as a "pressure point" against the U.S.

Understanding this requires understanding a fundamental imbalance between the U.S. and Iran: Trump has a term limit, Iran does not. As a dictatorship, the Islamic Republic has existed for almost half a century without the pressure of elections. Iran does not need to accomplish anything by the end of 2026. It just needs to wait. Wait until Trump's midterm election window closes, wait until the Republicans face pressure in the House, wait until the political cost in Washington is high enough, wait until the U.S. finds its own reasons to step down.

If Trump continues hostilities and sends troops into Iran, it means the U.S. will once again be embroiled in this war, possibly getting entangled with Iran for a long time, which does not align with U.S. national security strategy and would impact many of Trump's domestic and foreign policy agendas.

Trump himself has also acknowledged the difficulty of the negotiations. He stated that the negotiations were going well, with agreement reached on most issues, but the one truly important point, the nuclear issue, was not resolved. The nuclear issue happens to be Iran's bottom line which it will never compromise on in the short term.

The current situation is this: Trump is facing the demands for rate cuts, midterm election pressure, and the military burden of going to war with Iran, all ticking on the same clock which is rapidly heading towards November. Iran doesn't need to win. It just needs to hold out and keep the negotiations dragging on.