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The Fed Prepared for One Economy. It May Walk Into a Different One.
On Saturday morning, Pakistan’s Prime Minister said a peace deal was closer “than ever before.” On Saturday afternoon, Trump posted that the signing was scheduled for Sunday and that the Strait of Hormuz would reopen to all traffic immediately. By Saturday evening, Iran’s foreign ministry had walked the timeline back, saying the signing “will not be tomorrow” but could happen “in the coming days.”
That ambiguity is the entire trade for Monday morning. If the deal is signed before futures open, oil gaps lower, yields fall, and equities rally on the removal of the single largest risk premium in global markets. If it is not signed, the market prices the delay and waits. Either outcome lands directly into Kevin Warsh’s first FOMC meeting, which begins Monday afternoon and concludes Tuesday with a rate decision, a press conference, and the most consequential dot plot in at least a year.
The projections problem. The FOMC’s staff economists have been building their Summary of Economic Projections for weeks. Those models ingested May CPI at 4.2% year-over-year, 172,000 jobs, a closed Strait of Hormuz, and oil above $90. Every one of those inputs pointed in the same direction: higher inflation, a stronger labor market, and no room to cut rates. J.P. Morgan’s Phil Camporeale said to expect “an explicit move away from a bias toward easing to a neutral stance on rates.” Goldman pushed its first rate-cut forecast into 2027.
But the economy that exists on Monday morning is not the economy the staff modeled two weeks ago. WTI crude has fallen more than 10% in four sessions, from above $95 to $84.88. Brent dropped below $88, its lowest since March. The Strait of Hormuz, closed since February 28, may reopen within hours of the deal being signed. Treasury Secretary Bessent told Fox News on Friday that “the challenging time with gasoline will pass” once the deal is finalized. Energy accounted for more than 60% of the monthly CPI increase in May. If the strait reopens and oil holds below $85, the June CPI print due July 14 could come in a full percentage point below May’s 4.2%.
The dot plot cannot adapt in real time. The dots are submitted before the meeting begins. If each committee member submitted their projection last week, those dots reflect an economy with oil above $90 and no deal. The press conference, however, is live. Warsh will face questions about whether the inflation the committee projected still applies if the Hormuz premium has collapsed. His answer will matter more than the dots themselves.
The market is pricing a 98.3% probability of no rate change, per CME FedWatch. That is not the question. The question is whether the dot plot signals one or two hikes by year-end, or whether the language shifts to “data-dependent” in a way that reopens the door to cuts if oil continues to fall. Before Friday’s jobs report, futures priced a 50% chance of a hike by December. After the report, that rose to roughly 70%. If the Iran deal collapses the energy impulse, that number could fall back below 50% within a week.
The 10-day arc. It is worth stepping back to see what just happened. On June 2, the S&P 500 closed at a record 7,609.78. Over the next eight trading days: 172,000 jobs against 80,000 consensus. A $1.3 trillion semiconductor selloff. CENTCOM strikes on Iran. CPI at 4.2%, the highest in three years. The Dow below 50,000. Then: Trump called off strikes. Oil fell 10%. SpaceX priced and rose 19% on its first day. The VIX collapsed from 22 to 17. The S&P recovered to 7,431, within 2.3% of the record. Gold surged 3% to $4,238 as investors hedged both outcomes.
The market that opens Monday is not the market that closed on June 5. The question is whether the FOMC knows that yet.
What to watch. If the deal is signed before Monday’s open, the trade is straightforward: oil gaps lower, energy stocks sell, airlines and transports rally, the 10-year yield falls on the inflation repricing, and equities test the June 2 record. If the deal is not signed but remains imminent, the market trades the ambiguity and waits for Tuesday’s dot plot. The worst outcome is a deal collapse with a hawkish dot plot: oil spikes, the rate-hike narrative solidifies, and the correction that started June 5 resumes from a higher starting point. Warsh’s press conference at 2:30 p.m. ET Tuesday is the single most important scheduled event of the quarter. How he frames the inflation split between headline and core, and whether he acknowledges the geopolitical variable, will set the tone for the rest of the summer.
Two events that could reshape the second half of 2026 land within 48 hours of each other. The Iran deal sets the oil price. The dot plot sets the rate path. If the deal is signed before the dots are published, the Fed’s projections arrive already stale. The market will price Tuesday afternoon accordingly.
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