Fed confidence in jobs market dulls expectations for aggressive 2026 rate cuts

Rising geopolitical risks and some hawkish communications from the Federal Reserve have kept the dollar well bid so far this week. Online betting market Polymarket suggests that the probability of a US strike on Iran by the end of March has almost doubled since the start of the week, after reports that the White House was mulling fresh military action against the republic - the FT has reported that Trump will decide on whether or not to strike within the next ten days.

Oil futures have reacted accordingly (Brent crude prices jumped to July highs above $71 a barrel yesterday), while the safe-haven currencies (including the dollar) were among the better performers in FX. Wednesday evening’s FOMC meeting minutes also struck a hawkish note.

Fed officials were surprisingly upbeat on the labour market, saying that downside risks to jobs had lessened, while noting that economic activity was relatively strong.

While this far from rules out further cuts to the fed funds rate at upcoming meetings, the lack of concerns over the jobs market suggests that not only is the focus perhaps back on inflation, but that calls for an aggressive pace of cuts in 2026 are maybe slightly excessive.