Austan Goolsbee, President of the Federal Reserve Bank of Chicago, said Middle East tensions could delay an interest rate cut into 2026 if inflation stays high. He said policy could still involve rate rises, a hold, or cuts, depending on how conditions develop.
He said the timing depends on how long current pressures last and whether inflation improves. He said if inflation does not show progress, expectations for improvement would be pushed back.
Goolsbee said the Fed is watching oil markets and the effect of fuel prices on inflation. He said progress on core inflation would be encouraging even if headline inflation remains high.
He said the Fed aims to bring inflation to 2%. He added that if inflation is 4%, rates should not be expected to return to 2%.
He said there has been good news on housing inflation. He said the Fed would not usually tighten policy during a supply shock and that inflation expectations have so far remained anchored.
He said inflation expectations could become unanchored if petrol reaches $5 and stays there for months. He also said he respects Kevin Warsh and expects a focus on the Fed’s legal mandate, not electoral politics.
Given the ongoing concerns in the Middle East, the timeline for any potential interest rate cut in 2026 is now in serious doubt. With Brent crude having jumped to nearly $98 a barrel in early April, the pressure on headline inflation is increasing significantly. We have to consider the real possibility that rates will remain on hold for the rest of the year.
The latest inflation report for March 2026 supports this cautious view, as it showed little improvement. Headline CPI ticked up to 3.6%, and more importantly, core inflation remained stubbornly high at 3.7%, showing that underlying price pressures are not easing. If we don’t see progress on core inflation soon, any optimism for rate relief must be postponed.
For derivatives traders, this means that positioning for a straightforward rate cut is now a high-risk strategy. The focus should shift towards trades that benefit from sustained high rates or increased volatility in the bond market. Options on SOFR futures that protect against a “higher for longer” scenario are becoming more prudent.
We have seen this before, particularly when looking back at the stubborn inflation data throughout 2025. During that time, the market repeatedly had to push back its expectations for rate cuts as progress stalled. That experience suggests we should not underestimate the resolve to get inflation back to the 2% target, even if it takes longer than anticipated.
The primary risk we are watching is whether inflation expectations become unanchored. If oil prices push gasoline towards $5 a gallon and it stays there for months, the entire policy calculus could change. Under those circumstances, we must accept that discussions could shift from when to cut rates to whether we need to raise them again.
