Remember when investors were basically planning their rate-cut victory lap? Yeah, about that. The party’s over, and it’s not coming back anytime soon. Back in January, Wall Street was practically giddy—traders were betting on two or three interest rate cuts in 2026. Fast forward to now, and the CME Fedwatch tool shows a 74% chance that the Fed won’t budge at all. Not even once. That’s a stunning reversal from the 5% odds they were giving that scenario just a couple months ago. So what happened? One word: oil. Or more specifically, geopolitics and the Strait of Hormuz. When the US and Israel started striking Iranian military targets, Iran basically said “fine, we’re closing the Strait of Hormuz”—which is kind of a big deal since roughly a third of the world’s seaborne oil passes through there. Brent crude has jumped over 40% since the conflict kicked off, and suddenly everyone’s worried about inflation making a comeback. Here’s the thing: the Fed absolutely hates inflation. Like, they *really* hate it. And when oil prices spike, inflation tends to follow. So instead of cutting rates to help the economy, the Fed is now in full “we’re not making the mistakes of 2022 again” mode. Chicago Fed President Austan Goolsbee basically confirmed this on Monday when he told CNBC that rate *hikes* are on the table if inflation gets out of control. Hikes! That’s the opposite direction from what investors were hoping for. Deutsche Bank’s analysts laid out the historical playbook: central banks tend to overcorrect for the last crisis. After the 2008 financial crisis, the Fed was too loose. After COVID, they were way too loose. So now, facing another inflation shock from oil prices, they’re determined not to repeat 2022’s mistakes. The result? A hawkish stance that’s basically the death knell for rate-cut expectations. Fed Chair Jerome Powell made it crystal clear at last week’s meeting: if inflation doesn’t cooperate, there won’t be rate cuts. Period. This is a problem for stocks because lower rates are basically the foundation of the bull case. When rates are high, bonds look attractive and stocks have to work harder to justify their valuations. Lower rates make stocks more appealing by comparison. No rate cuts means that tailwind disappears. Now, there’s a tiny glimmer of hope. Trump said on Monday that the US and Iran had “productive” talks about ending the conflict. If that actually leads to de-escalation, oil prices could fall, inflation fears could ease, and the Fed might reconsider. But right now, the Strait of Hormuz is still closed, and the odds of a rate cut this year have basically evaporated. The moral of the story? Geopolitics beats Fed policy. And sometimes, a war halfway around the world can kill your investment thesis faster than you can say “CME Fedwatch tool.”
