The Federal Reserve raised interest rates to 3.75-4 per cent at its September 2026 meeting, with most rate-setters expecting another increase before year-end and rates remaining above 4 per cent until end-2027. Fed chair Kevin Warsh cited strong US economy, above-target inflation, and unfavorable Middle East geopolitical developments as drivers of the tightening decision.

Two energy price scenarios emerge: a "tensions subside" path where US-Iran deals restore Gulf energy flows, lowering prices; and a "tensions remain" scenario where supply restrictions keep prices elevated. The Fed's rate path depends heavily on Gulf developments, with potential for additional rate increases through June 2027 if energy prices stay high or escalate militarily.

If Gulf tensions ease and energy prices fall, the Fed will likely hold rates at the October 28 meeting before gradually easing policy by late 2027-2028. Rate cuts will not begin until inflation consistently trends toward the 2 per cent target after more than five years of excess inflation.