Fed’s John Williams says economic uncertainty makes firm guidance inappropriate. The odds of the federal funds rate being 4.25% by the end of 2026 sit at 62% YES, up from 47% last week.
Williams’ comments have traders recalibrating rate expectations. The end-of-2026 market now reflects a higher likelihood of persistent rates, fueled by ongoing conflict in Iran affecting commodity prices. With 259 days to resolution, the market has shifted notably, with traders pricing in sustained inflationary pressures. In contrast, the Fed’s Jan-Apr rate decision market saw the probability of a cut-pause-pause pattern fall to 28% YES, down from 43% last week.
Trading volume remains thin despite the geopolitical turmoil. The end-of-2026 market shows no recent 24-hour trading activity, meaning sentiment has shifted but traders may be waiting for more data before committing funds. The Fed’s January-to-April decision market also shows no recent trades, consistent with a wait-and-see posture as conditions change rapidly.
Williams’ remarks point to the risk of prolonged stagflation, which would constrain the Fed’s ability to lower rates without worsening inflation. Brent crude is over $120 a barrel, and prices for fertilizers and natural gas are under pressure, making the path to rate cuts harder. For traders, buying YES shares at 38¢ in the Jan-Apr market pays $1 if the Fed unexpectedly cuts, a potential 2.63x return, though that requires belief in a swift resolution to current economic pressures.
Watch for Jerome Powell’s next statements and any shifts in the FOMC’s stance on inflation expectations and the impact of the Middle East conflict. These will directly affect how both markets reprice.
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