Global markets to be driven by West Asian conflict, Fed’s neutral guidance reflects uncertainty: report

Global financial markets are expected to remain affected by the ongoing conflict in West Asia, with risk aversion likely amid rising uncertainty, an ICICI Bank report said.

“Markets are expected to continue to be shaped by the ongoing conflict in the Middle East which has so far shown no signs of de-escalating,” the report said, adding that “risk aversion is expected.”

According to the report, before the conflict, the base-case scenario assumed that “tariffs will begin to pass and that US inflation will gradually push downwards and labor markets will remain weak which could open scope for a 50bps cumulative cut in 2H2026.”

However, the report cautioned that “ongoing conflict and particularly whether there is a structural pick-up in crude prices could shape the outlook,” which the Federal Open Market Committee (FOMC) may need to consider in its estimates.

It added that “there are risks to possible FOMC back-loading easing, although it is too early to make a call at the current time,” a view based on “the duration of the Middle East conflict and its lasting impact on oil prices.”

The report highlighted that the FOMC kept policy rates unchanged while “clearly acknowledging the building of uncertainty in view of the ongoing conflict in the Middle East” and also acknowledging weakness in the labor market.

Despite the geopolitical challenges, the report notes that the FOMC has raised its GDP growth forecasts and revised its inflation forecast, “expecting to achieve the 2 percent target by 2028.”

However, policy rate guidance was unchanged, with “members expecting a midpoint cut of 25bps in 2026 and 25bps in 2027.”

The report added that FOMC Chairman Jerome Powell “stressed that the central bank will maintain a data-driven response” and highlighted that “substantial uncertainty remains about the impact of the conflict on the outlook for the economy.”

It also warned that if oil prices remain high “there is a risk of higher energy prices and a possible rate delay from their pass-through to consumer prices”.

For markets, the report said the FOMC meeting was “largely a non-event,” but added that “conflict in the Middle East is likely to drive price action by ensuring risk aversion remains strong,” with US yields expected to rise further and the global dollar likely to remain supportive. (ANI)