Stocks Shrug Off War Jitters Ahead of FOMC

CME FedWatch implies 99% odds the Fed holds rates steady at the 3.50%-3.75% target range this week. The effective fed funds rate sits at 3.64% as of February, unchanged from January after three consecutive cuts totaling 58 basis points since September 2025.

The real question is the dot plot. Goldman Sachs and Barclays have both pushed their first-cut forecasts to September, citing the oil shock from the Iran conflict as an inflation wildcard. Goldman previously expected easing to begin in June. If the median dot shows zero cuts for 2026, that would be a genuine hawkish surprise — and the 10-year yield, already at 4.28% and climbing 23 basis points in two weeks, has room to run higher.

Chair Powell's press conference will be parsed for any shift in the "data dependent" language. Markets want to know: does the Fed view the oil spike as a transitory supply shock, or as a genuine threat to the disinflation narrative? For a deeper look at how this week's meeting could reshape rate expectations, see our March FOMC preview.

While equities found their footing, the bond market kept selling. The 10-year Treasury yield rose from 4.05% on March 2 to 4.28% by March 13 — a sharp move that reflects repriced rate expectations, not a flight from risk. The 2-year yield climbed from 3.47% to 3.73% over the same period.

The 10-year minus 2-year spread held steady at 55 basis points, maintaining the positive slope that has persisted since the curve un-inverted in late 2024. A stable spread during a yield backup means the entire curve is shifting higher in parallel — the bond market is repricing the terminal rate, not signaling recession. For a full breakdown of how interest rates transmit to stock valuations, see our deep dive.

For equity investors, the yield move creates a valuation headwind. The S&P 500 trades at roughly 26.6x trailing earnings on SPY. At a 4.28% risk-free rate, the equity risk premium is razor thin. Any further yield backup makes stocks relatively less attractive without a corresponding acceleration in earnings growth.

CPI rose to 327.46 in February from 326.59 in January, a month-over-month increase that translates to roughly 3.2% annualized. That was before the full impact of oil above $100 hit the data.

The Iran conflict has added a genuine supply-side inflation risk that the Fed cannot control with interest rates. Raising rates would slow demand and potentially tip the economy toward recession. Holding rates allows the oil-driven inflation impulse to flow through. Neither option is attractive, which is exactly why the market expects Powell to punt — hold rates, maintain optionality, and hope the geopolitical premium fades. For portfolio positioning in this environment, see $95 Oil and Stagflation: Where to Hide Now.

Airlines provided an interesting real-economy test case on Monday. Delta, United, and American all raised revenue guidance despite fuel costs surging. That signals consumers are still spending on travel and services, absorbing higher ticket prices without balking. Strong demand in the face of cost-push inflation is precisely the scenario that keeps the Fed hawkish — it means rate cuts risk overheating an economy that's already running hot enough.

Three scenarios, ranked by probability:

Base case (70%): Hawkish hold, dot plot shows one cut in 2026. Powell emphasizes data dependence, notes oil risks without overreacting. Stocks drift sideways, the 10-year holds near 4.25-4.30%. This is largely priced in.

Bull case (15%): Dovish surprise, dot plot keeps two cuts. The Fed signals it views the oil shock as temporary and growth risks as more concerning than inflation. Equities rally 1-2%, yields drop, and the VIX compresses toward 20.

Bear case (15%): Zero cuts in the dot plot. The Fed signals inflation is the primary risk and rates stay higher for even longer. The 10-year spikes toward 4.40%, the Nasdaq sells off 2-3%, and the VIX jumps back above 27.

Regardless of the scenario, the initial reaction rarely holds. The real trade is in the days after, once positioning unwinds and the market digests the full statement, projections, and press conference.