Here’s the most likely way the Fed could disappoint investors Wednesday

Heightened uncertainty over tariffs, the direction of oil prices, and their impacts on inflation is giving way to a risk that Federal Reserve officials may not be able to cut interest rates in two quarter-point increments this year as they had previously expected.

The central bank’s median projection for this year, known colloquially as the 2025 “dot,” is the focus of many market participants ahead of the Fed’s coming policy announcement on Wednesday. Since March, the 2025 dot has pointed to two interest-rate reductions by the end of the year, and fed-funds futures traders currently see only a 37.7% chance of the Fed delivering something less than this — setting the broader financial market up for what may turn out to be a disappointment.

President Donald Trump’s April 2 “liberation day” announcement of a 10% baseline tariff on most imports, followed by a 90-day pause set to expire in July, and the lack of a permanent resolution in the U.S.’s trade war with China have injected a greater degree of uncertainty into the outlook. Separately, the Israel-Iran conflict, which began late last week and stretched into its fifth day, has led to back-and-forth moves in oil prices and worries about a supply disruption that could lead to a fresh inflation wave.

Read: Israel-Iran conflict raises alarm over Strait of Hormuz. What it means for oil prices and inflation.

In an email on Monday, Matthew Ryan, head of market strategy at financial services firm Ebury, said his U.K.-based firm thinks two 2025 fed rate cuts will remain the base case for most policymakers, “who may not necessarily have enough conviction to materially alter their view given the acute tariff uncertainty. There is a risk, however, that a handful of officials see less cuts this year than previously anticipated, which may be enough to tip the balance in favor of just one 25bp cut in 2025.”

He added, “A hawkish dot plot and remarks [from Powell] that stress a lack of urgency to lower rates could allow room for some dollar strength in the second half of the week.”

All three major U.S. stock indexes DJIA SPX COMP finished lower on Tuesday as investors monitored the escalating war between Israel and Iran. Crude-oil futures CL.1 jumped more than 4% and U.S. government debt rallied, sending 10- BX:TMUBMUSD10Y and 30-year yields BX:TMUBMUSD30Y down by the most in almost three weeks. The ICE U.S. Dollar Index DXY, a measure of the U.S. currency against a basket of six peers, rose almost 0.8% to around 98.76 as market participants assessed the risk that the Fed may pull back on its 2025 interest-rate forecast, boost its inflation forecast for this year, or both on Wednesday.

For the past three months, Fed officials have been expecting inflation and core reading from their preferred price gauge to come in at 2.7% and 2.8%, respectively, for 2025, before drifting down toward their 2% target in 2027 and over the longer run. They’ve left the fed-funds rate target at between 4.25% and 4.5% since last December. Now, traders are mostly expecting policymakers to deliver their first 2025 interest-rate cut in September.

Market participants will be reacting on Wednesday to “a combination of the dots and the dots as they relate to how the Fed forecasts inflation,” according to Greg Faranello, head of U.S. rates trading and strategy at AmeriVet Securities in New York.

Via phone, Faranello said a forecast of only one 2025 rate cut would probably be viewed as “more hawkish” and likely lead to a rise in short-term rates like the 2-year yield, which would then be a buying opportunity for some investors. “Treasury yields have been rangebound for about two months, and people in the rates market are saying, ‘We don’t know what’s going to happen.’” In addition, the Fed may not cut borrowing costs at all this year, he said.

Traders might look past the Fed’s updated 2026 and 2027 rate projections because there’s too much uncertainty over the inflation outlook, and they could temper their reactions to Powell’s press conference since the Fed chair’s term expires next year and Trump will be looking for a replacement, he said. “The overall trajectory in rates is going to be lower, that much is for sure. It’s a question of how fast we get there,” the strategist added.