The Federal Open Market Committee left the federal funds rate unchanged at 3.50-3.75% at its April 29 meeting, and Friday's March personal consumption expenditures data reinforced the case for an extended pause. Headline PCE came in at 2.7% year-on-year and core at 2.6% — both 10 basis points above the median economist forecast — with energy costs contributing the largest single-month upward pressure since the Ukraine shock of early 2022.
The data triggered an immediate repricing in interest rate markets. Fed Funds futures now price only 38% probability of a June 17 rate cut, down from 52% a week ago and 71% at the start of April. The total number of cuts priced for 2026 dropped to 1.6 from 2.4 in 24 hours. The 2-year Treasury yield rose 6 basis points to 4.21%, while the Dollar Index DXY surged to 105.20 — a fresh 2026 high.
Energy Pass-Through Risk
The March PCE data captured only the initial phase of oil's Iran war surge. Brent crude averaged approximately $95 in March but has since climbed above $110, implying significant additional energy pass-through in the April and May readings. Cleveland Fed's inflation nowcast currently projects April headline PCE at 2.9% and core at 2.7%, which would represent the first acceleration in core PCE since mid-2025.
Fed Communication
Wednesday's release of the April FOMC minutes will be parsed for any discussion of energy-driven inflation scenarios. Fed Governor Christopher Waller said in a speech last week that 'we cannot look through energy shocks the way we did in 2023-24 because the persistence characteristics are fundamentally different when the supply disruption has no clear resolution timeline.' This was widely interpreted as building the case for a prolonged hold.
Outlook
The bond market is now pricing a terminal rate of 3.25% for this cutting cycle — implying just two more quarter-point cuts from the current 3.50-3.75% — down from expectations of 2.50% at the start of the year. Friday's May employment report is the next major data point. Consensus expects 180,000 nonfarm payrolls and a 3.8% unemployment rate, though the survey period predates the most recent escalation of conflict-related economic disruption.