Ceasefire Reduces Fed Cut Urgency, Inflation Risks Persist

Markets initially interpreted the de-escalation as increasing the probability of policy easing, but Timiraos argues this view overlooks a hawkish shift in the Fed's risk balance. Previously, the primary justification for rate cuts centered on the risk of a recession due to escalating tensions disrupting supply chains and weakening demand.

With the ceasefire, this worst-case growth scenario is largely removed. However, inflation risks remain elevated, as energy and goods prices that rose during the conflict will not fully retrace, especially if supply disruptions and elevated transport costs continue.

At the same time, financial conditions have eased due to improved sentiment, and the labor market remains resilient, further reducing the need for the Fed to provide support through rate cuts. This creates an asymmetric risk profile where diminished growth threats leave policymakers with less justification to ease policy in the near term, forcing the Fed to manage persistent inflation without the counter-argument of a weakening economy.