PIMCO CIO Warns Iran War Could Force Fed Rate Hike

The Federal Reserve held rates steady at 3.50%-3.75% on April 29, but four Fed presidents dissented-arguing the central bank should have signaled potential rate hikes. It's the most internal disagreement in over 30 years.

The Iran conflict has upended monetary policy expectations. Before the war, multiple rate cuts were expected. Now, PIMCO-the world's largest active bond manager-has cut its 2026 rate cut forecast from four to just two, likely in Q4. PIMCO's CIO warns that sticky inflation could force the Fed to actually raise rates.

Two-thirds of investors now expect rates to hold steady through 2026, up from forecasts of cuts earlier this year. Kalshi, the prediction market, sees a 43% probability of a rate hike before July 2027.

Rising oil prices from the conflict act as a tax on the economy, driving inflation that the Fed's demand-side tools can't easily fix.