How Did The War In Iraq Impact Fed Rate Cut Odds?

So, far the change is very subtle.

Chart Note

I created the above chart with CME Fedwatch data
There are 7 more Fed meetings in the months shown.
I took a weighted average of target rate probabilities for today and from a wee ago.

The biggest change is for December. A week ago the implied probability was 3.07 percent. Today it’s 3.15 percent, 8 basis points higher.

A quarter-point cut is 25 basis points, so 8 basis points higher takes out about a third of a cut.

The Fed’s current target rate is 3.50 to 3.75 percent, with the middle at 3.625 percent.

3.625 minus 3.15 is 0.475. That’s just under quarter-point cuts. A week ago, the market expected just over two quarter point cuts.

Five Key Competing Forces

Jobs
Rent
Oil
Health Care Insurance
Tariff Impacts

Jobs and Rent are disinflationary forces. The labor market is weak, and the rate of increase of rents is falling.

Oil and Health Care Insurance are inflationary forces. Oil has bottomed and Health Care Insurance is a disaster. I expect Health Care to show up in the January PCE report due later this month.

Tariffs have a stagflationary impact in that they cost jobs but tend to raise prices.

This year, the bond market is mostly in line with a disinflationary expectation. If that continues, falling demand from job losses rates to be the key idea.