This week, investors will focus not only on the situation in the Middle East. Another important event is the two-day meeting of the Federal Open Market Committee. In addition to its rate decision, the Fed will release updated projections for interest rates and the broader economy through 2027.    

To start, despite growing pressure from Donald Trump for Jerome Powell to begin easing sooner, the Fed is widely expected to keep rates unchanged, at least through September. According to CME Group data, there’s a 0% chance of a cut in June. The odds of a hike are slightly higher, though still just 0.2%.  

Now, if the Fed were to cut rates unexpectedly, the Nasdaq and S&P 500 could rise sharply. But at the same time, the US dollar could fall, as markets could interpret the move as a sign that the Fed is bowing to political pressure and losing its independence in setting monetary policy.    

What does the macroeconomic data say the Fed should do?       

Given the Fed's dual mandate of maximizing employment and maintaining price stability, let's focus on the corresponding data. Starting with the former, the latest nonfarm payrolls report showed an increase of 139,000 jobs. This is slightly below the six-month average of 157,000 but not alarming.      

The unemployment rate, meanwhile, remained at 4.2%. Thus, the Fed has no urgent need to lower rates for employment reasons: the labor market is not in crisis. And with tighter controls on illegal immigration, labor conditions could remain relatively stable for longer. 

On the inflation side, headline CPI rose just 0.1% in May, down from 0.2% in April. Year-over-year, it was 2.4%, and core CPI came in slightly lower than expected at 2.8% versus 2.9%. Short-term inflation expectations dropped a lot—from 6.6% to 5.1%—but long-term expectations barely moved, going from 4.2% to 4.1%. 

This suggests that tariffs and uncertainty are weighing more on demand than driving up input costs. 

The problem is that an escalation in the Middle East could scupper disinflation. In a worst-case scenario, a spike in oil to $100 or even $130 per barrel could put the brakes on easing and force the Federal Reserve to tighten monetary policy. Some forecasts are already pointing in that direction.