Energy, confidence, and the rates outlook: markets reassess

This week's Fed meeting, alongside the Bank of England (BoE) and the European Central Bank (ECB) meetings provide a good opportunity to consider how far markets have already moved this year.

The chart below shows the number of hikes (positive values) or cuts expected by these central banks by the end of 2026. The dotted line marks when the conflict escalated, although oil prices had already begun to rise beforehand.

Number of policy rate hikes (cuts) by the last meeting of 2026

Source: Bloomberg

Key points to note:

1. The Fed was expected to cut rates twice this year at the start of the year; this is now down to just one cut. Given its dual mandate of employment and inflation, and given that the US economy is less exposed to the energy shock, one further cut remains plausible in the second half of the year if oil stabilises and the new Chair can secure a majority.

2. Europe and the UK face significant challenges if oil prices remain elevated (spot around $100, easing to ~$80 one year forward). The risk is stagflation. Second-order effects, particularly via fertiliser and transport costs, will keep inflation elevated beyond the initial shock to fuel and household energy prices.

3. The median expectation on the Fed committee showed a combination of 0.2% higher inflation expectations plus one further cut in 2026 and another cut in 2027. The market took this as showing great tolerance for energy-induced inflation, treating it as 'transient' (although that word is now verboten).

4. Powell has indicated he will only resign once the investigation into the Federal Reserve’s building cost overruns is concluded with “transparency and finality.” This prevents the White House from immediately filling the chair position and potentially handing it to Kevin Warsh, President Trump’s nominee. It is important that the Federal Reserve remain independent so it can stay focused on its mandate and avoid undue political influence.

   
   

The ECB was already expected to be at the end of its cutting cycle, but markets now price in at least one hike as inflation pressures persist. Similarly, the Bank of England was expected to deliver one or two cuts this year, but markets now anticipate rates remaining on hold throughout.

Oil prices appear to have stabilised for now (though I should probably fill up the car as a hedge). Crude hasn’t gone parabolic, partly because some supply is still moving through the Strait, and there is infrastructure redundancy: Saudi Arabia can route oil via the Red Sea, and the UAE can export through Fujairah, bypassing the Strait for a meaningful share of supply.

However, natural gas, fertiliser, and feedstocks such as sulphur lack similar alternatives. This leaves Europe and the UK particularly exposed relative to the US. As a result, higher food prices are likely regardless of how quickly the conflict resolves, given that under-fertilised crops today imply lower yields later in the year.

Finally, while the ECB and BoE are bound by their inflation mandates, they must also consider demand destruction from higher energy prices and weakening confidence. This tension helps explain why markets quickly dial back expectations for rate hikes when equities fall sharply.

Fun fact - What you didn't know about acid rain

You may remember from high school biology that nitrogen, phosphorus and potassium are key to crop growth, hence the need for fertilisers. But sulphur is now recognised as the fourth key nutrient. Historically, farmers didn't need to apply it because acid rain provided sulphur for free. As global emissions standards have cleared the air, sulphur deficiencies in soil have to be addressed with specialised sulphur fertiliser. Much of the sulphur needed passes through the Strait of Hormuz.

Mark Greenwood, Deputy CIO, Atlantic House.

Also known as the Inflation Whisperer.