West Asia Conflict, Fed Uncertainty to Drive Global Markets: Report

The report said that "markets are expected to continue to get shaped by the ongoing conflict in the Middle East that has so far not shown signs of de-escalating," adding that "risk aversion is expected to remain in place."

According to the report, prior to the conflict, the base-case scenario assumed that "the tariff pass through would start to fade and that would push US inflation gradually lower and labour markets would remain weak that could open scope for a 50bps cumulative cut over 2H2026."

However, the report cautioned that "the outlook could get shaped by the ongoing conflict and in particular whether there is a structural pick-up in crude prices," which the Federal Open Market Committee (FOMC) may need to consider in its projections.

It added that "there are risks of the FOMC possibly back-loading easing, although it is too early to call at the current juncture," with the outlook depending on "the duration of the Middle East conflict and permanent impact it has on oil prices."

The report highlighted that the FOMC maintained status quo on policy rates while "explicitly acknowledged the build-up of uncertainty in the outlook from the ongoing conflict in the Middle East" and also recognised weakness in the labour market.

Despite the geopolitical challenges, the report noted that the FOMC raised its GDP growth projections and also revised inflation forecasts upward, with "the 2 per cent target expected to be achieved by 2028."

However, there was no change in policy rate guidance, with "the median of members expected 25bps cut in 2026 and 25bps cut in 2027."

The report added that FOMC Chair Jerome Powell "emphasized that the central bank will maintain a data-dependent response" and highlighted that "considerable uncertainty persists about the impact of the conflict on the outlook on the economy."

It also warned that "higher energy prices and pass-through of the same into consumer prices implies risk of a possible delay" in rate cuts if oil prices remain elevated.

For markets, the report said the FOMC meeting was "largely a non-event," but added that "the conflict in the Middle East is likely to drive price action ensuring that risk aversion remains dominant," with US yields expected to drift higher and the global dollar likely to remain supported.

- ANI