How the Fed could affect your portfolio
Will the Fed hold, cut or hike rates?
CIBC Investor’s Edge
Apr. 28, 2026
5-minute read
Investors are now wondering what to expect from the U.S. Federal Reserve, with the prospect of Kevin Warsh replacing Jerome Powell as Chair. Yet despite early calls for aggressive rate cuts under a new Fed Chair, the market is not expecting much change.
In this article, we look at why the market is expecting rates to be on hold, what could push the Fed from hold to bold — including scenarios where the Fed could be forced to cut or hike — and why investors should likely not bank on any particular Fed move.
At the moment, the Fed appears to be boxed in by its dual mandate — maintaining stable prices, while supporting maximum employment:
- Inflation was 2.4% in February 2026, slightly above the target rate of 2%. This is below the 3% level, where the case for rate hikes would become stronger to temper the risk of rising inflation.1
- Unemployment was 4.4% in February 2026, well above the lows of 2024 through2025. This is below the 5% level, where the case for rate cuts would become stronger to address the risk of recession from a weakening labour market.
In effect, the Fed doesn't have a strong need to hike for inflation or cut for the labour market. Reflecting this lack of urgency, financial markets currently predict that interest rates will remain on hold until fall 2027.2 This is a rapid change in expectations, compared to the calls in late 2025 for aggressive rate cuts in 2026.
While the domestic economic outlook in the United States may suggest a pause in policy, an extended conflict with Iran could create an easing or hiking shock for the Fed:
- Easing shock – If the war continues through 2026, the government may need to borrow more money in a hurry. This would likely involve the Fed buying government bonds, as it did in 2008 through 2009 and 2020. A rapid expansion of the Fed's balance sheet would likely mean much lower short-term rates to finance the additional debt.
- Hiking shock – If the military aspect of the conflict abates but the Strait of Hormuz remains blockaded, this could put oil at over $100 per barrel. If oil prices stay above this level for any length of time, the Fed would likely have to hike to contain the risk of inflation.
The hiking shock shows the limits of what Fed policy can achieve in response to geopolitical events. Let's compare an oil-driven hike in 2026 to the pandemic-driven hike in 2021. After the first year of the pandemic, inflation started to rise because goods were not being shipped fast enough to meet demand. The Fed raising rates in 2021 was not going to get more goods moving from China through the Port of Los Angeles. In a similar way, the Fed raising rates in 2026 would not get more oil moving through the Strait of Hormuz. Fed policy is more likely to be effective when it responds to the domestic economy than to geopolitical events.
In the long bull market extending from 2009 to the present, investors in U.S. stocks have become accustomed to the Fed keeping rates low and intervening to nip any recessions in the bud. This dovish stance has been particularly favourable for technology firms, who have been able to borrow cheaply to fund capital expenditure. But now the range of Fed policy uncertainty is much wider than at any time in the last decade. Pausing, cutting and hiking are all potentially on the table, even if pausing is the base case from current market expectations.
In this context, investors may wish to check that their portfolios are not too heavily biased towards any particular Fed move. While mega-cap U.S. technology stocks have thrived in an environment of low rates and geopolitical stability, changes to this macro situation may open up other opportunities, including defence stocks, energy stocks and countries with higher levels of energy independence. In an ambiguous and lengthy pause of Fed policy, one could make a case for high-quality, dividend-paying stocks, including those that are less volatile than the broad market. The risk of a hiking shock, while low, may give investors pause for thought about exposure to longer-dated bonds.3
- The Fed appears to be boxed in by its dual mandate, with no strong impulse to hike for inflation or cut for the labour market. Reflecting this, financial markets currently expect no change in U.S. interest rates until fall 2027.
- While the domestic economic outlook in the United States might suggest an extended pause for interest rates, the conflict with Iran could force the Fed into easing to finance the war or alternatively, into hiking to contain the fallout from high oil prices.
- Investors should likely not assume any particular policy direction from the Fed, including the policy of historically low interest rates that has supported U.S. technology stocks over the last decade.
1 The Federal Reserve targets a long-term inflation rate of 2%, based on personal consumption expenditures (PCE), rather than the Consumer Price Index (CPI). The Fed does not have explicit targets for the lower or upper band of the inflation range, although analysts typically consider 1% to be low and 3% to be high.
2 CME FedWatch, implied interest rates from Federal Funds futures Opens a new window..
Select "Probabilities" to see when the market expects interest rates to change from current levels. These implied interest rates are dynamic and can change rapidly to reflect market expectations.
3 In 2022, the last hiking shock, the U.S. bond market dropped by 13%, while U.S. long-term Treasury bonds dropped by 30%. U.S. bond market represented by iShares Core U.S. Aggregate Bond ETF (AGG); U.S. long-term Treasury bonds represented by iShares 20+ Year Treasury Bond ETF (TLT).
