Traders are increasingly expecting a Federal Reserve interest rate cut by the end of the year, with market-implied odds rising sharply to about 43%, up from just 14% before the U.S. and Iran agreed to a ceasefire. The easing of tensions has reduced fears that elevated energy prices would fuel inflation, which had previously made the Fed less likely to cut rates. Markets are now pricing in a modest decline in the benchmark rate to around 3.5% from the current 3.64%, with expectations leaning toward at least one cut this year.

Analysts note that if inflation remains stable and geopolitical conditions hold, the Fed could begin cutting rates later in the year, potentially starting in late summer or early fall. The Consumer Price Index readings for March were in line with expectations with the Core CPI coming in one tenth lower than estimates. While most forecasts call for one or possibly two cuts, Citigroup stands out with a more aggressive outlook, projecting up to three rate cuts beginning in September if inflation continues to ease. Overall, the shift in sentiment reflects growing confidence that inflation risks may subside, though uncertainty remains tied to both economic data and the durability of the ceasefire.

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