Global markets to remain driven by West Asia conflict, Fed neutral guidance reflects uncertainty: Report
Why it matters: Geopolitical tensions are now the primary driver for markets, potentially delaying rate cuts and increasing volatility.
- Global markets are expected to remain driven by the Middle East conflict, leading to sustained risk aversion and potential upward drift in US yields, while the global dollar remains supported.
- The FOMC held policy rates steady, explicitly recognizing the uncertainty from the Middle East conflict and weakness in the labor market, yet surprisingly raised GDP growth and inflation forecasts, targeting 2% inflation by 2028.
- Prior market expectations for 50bps cumulative rate cuts by 2H2026 are now at risk, with potential delays if the conflict structurally increases crude prices, which the FOMC will consider in its projections.
- FOMC Chair Jerome Powell stressed a data-dependent response, highlighting considerable uncertainty regarding the conflict's economic impact and the risk of back-loading easing if elevated energy prices persist.
- Policy rate guidance remained unchanged, with median member expectations for only 25bps cuts in both 2026 and 2027, indicating a cautious, neutral stance despite the revised economic outlook.
Global markets face sustained uncertainty as the Middle East conflict drives risk aversion and could delay anticipated rate cuts, despite the Federal Open Market Committee (FOMC) maintaining policy rates and raising growth projections. The FOMC explicitly acknowledged the geopolitical impact, emphasizing a data-dependent approach while keeping future easing guidance neutral, reflecting the unpredictable nature of oil prices and their effect on inflation.
