TD Securities strategists Oscar Munoz and Eli Nir link US macro conditions and Federal Reserve policy expectations to developments in Iran, recent inflation readings, and incoming activity data. They expect higher oil prices and geopolitical uncertainty to raise stagflation risks and keep policy restrictive.
They expect the Fed to stay on hold until September 2026 while it assesses the situation in Iran and its economic effects. They also expect inflation progress to resume by then, supporting a gradual move towards a more neutral stance.
Higher Oil Prices Raise Stagflation Risks
They forecast 50bps of easing in 2026, split between September and December. They also project a further 25bps cut in March 2027, leaving the Fed funds rate at 3.00%.
The article says it was created with the help of an Artificial Intelligence tool and reviewed by an editor. It also states that future decisions will depend on incoming data.
Given the recent escalations near the Strait of Hormuz and last week’s March CPI print coming in hotter than expected at 3.1% year-over-year, we expect the Federal Reserve will remain patient. The central bank is likely to stay on hold until its September meeting as it assesses the impact of these developments on the economy. This policy path will be highly dependent on incoming data to force the Fed’s hand.
For interest rate traders, this suggests the market may be pricing in rate cuts too early. Fed funds futures currently imply a nearly 40% chance of a cut by July, which we view as overly optimistic in this environment. Therefore, positions that bet on a hawkish hold, such as selling front-month SOFR futures or buying puts on them, could be advantageous.
Positioning For Volatility And Defensive Trades
This combination of geopolitical risk and sticky inflation points to elevated market volatility. With the VIX index climbing back toward 19, it is prudent to consider owning protection against sudden shocks. Buying call options on the VIX or related ETFs provides a direct way to hedge portfolios against rising uncertainty in the coming weeks.
The stagflationary pressure from higher oil prices, with WTI crude now holding firmly above $98 a barrel, should not be underestimated. We believe this geopolitical risk premium is likely to persist, making bullish positions on energy attractive. Using call spreads on oil futures or the USO ETF can offer upside exposure while clearly defining the risk.
Looking back, we saw the Fed signal a more patient approach in late 2025 after inflation proved more persistent than forecasts had suggested. The market’s initial hopes for several cuts in the first half of 2026 were based on a disinflationary trend that has now stalled. This history supports our view that the bar for the Fed to begin easing is much higher now.
In the equity space, this environment is challenging for stocks as high input costs and restrictive policy can squeeze margins. We would recommend using options to establish a defensive posture on growth-sensitive indices like the Nasdaq 100. Buying put spreads or selling out-of-the-money call spreads could protect against potential market downside through the summer.
