CAMBRIDGE SIGMA | GLOBAL RISK INTELLIGENCE | 25 APRIL 2026
Summary
All four major central banks held rates this week against the backdrop of Operation Epic Fury and a contested Strait of Hormuz. The global rates market has repriced from a synchronized easing cycle to one where hikes are now being priced across the three major Western central banks. Brent crude closed at $105.33/bbl today. US-Iran direct talks expected in Islamabad this weekend offer the first real diplomatic off-ramp, but the market remains skeptical — oil is still up ~18% on the week.
Interactive Stagflation Risk Dashboard
Use the interactive gauge below to stress-test macro scenarios. Drag sliders to adjust individual inputs, or click preset scenarios to see how different macro regimes score on our dual-leg stagflation model. The model uses a multiplicative interaction term — stagflation risk only spikes when both the inflation leg AND the weakness leg fire simultaneously.
Interactive Dashboard
Adjust sliders to stress-test stagflation scenarios across our dual-leg model — inflation leg and weakness leg must fire simultaneously for risk to spike.
Open Interactive Gauge →Federal Reserve — Hold at 3.50-3.75%
The FOMC voted 11-1 on March 18 to hold the fed funds rate at 3.50-3.75%. Governor Miran dissented in favor of a 50bp cut. The dot plot median held at 3.4% year-end (one 25bp cut), but the distribution shifted hawkish — 4-5 members moved from two projected cuts to one, and seven of 19 participants now expect no cuts at all this year.
The SEP told the story: PCE inflation was revised up to 2.7% for 2026 on both headline and core. GDP growth was nudged to 2.4%. Powell’s presser was the real signal — he said inflation progress has been less than “hoped,” near-term expectations had risen on the oil shock, and job creation has “slowed to essentially zero.” He explicitly rejected the stagflation label but acknowledged the Fed cannot gauge the war’s impact: “The thing I really want to emphasize is, nobody knows.”
Market pricing post-meeting: Fed funds futures took any realistic chance of a cut off the table until at least December (60% probability). Before the Iran conflict, markets had been pricing two cuts with a chance of a third. Goldman Sachs (Rosner) still sees room for two normalization cuts, contingent on conflict duration. The hot PPI print on Tuesday reinforced the higher-for-longer narrative.
ECB — Hold at 2.15% (Deposit Facility 2.00%)
The ECB kept all three rates unchanged on March 19. The statement was notably hawkish: the war “has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth.” Staff projections revised headline inflation up to 2.6% for 2026 (from ~2% in December) and cut GDP growth to 0.9%. Lagarde vowed the ECB will “do all that is necessary” to control inflation. European natural gas surged 25% to above €68/MWh following Iranian strikes on Qatar’s Ras Laffan LNG hub. Market pricing has flipped from cuts to one or two rate hikes this year.
Bank of England — Hold at 3.75%
The BOE held at 3.75% facing the worst trade-off of the four major CBs. JPMorgan described the dilemma: “stubborn inflation, a weakening jobs market, and little fiscal wiggle room.” UK unemployment is at a five-year high of 5.2%, yet energy pass-through threatens to push inflation back up. Berenberg warned that if energy prices remain high for six months, cuts could be delayed until 2027. Markets have pivoted from pricing two cuts to bracing for up to two hikes.
Bank of Japan — Hold at 0.75%
The BOJ held at 0.75% in an 8-1 vote, with board member Takata dissenting in favor of 1.0%. Japan gets ~95% of its energy imports from the Middle East, making it exceptionally exposed to the Hormuz disruption. The BOJ noted upward inflation pressure from crude oil. Most economists expect the next hike in October, but BofA expects June with rates reaching 1.5% by end-2027. Shunto wage results and yen dynamics (near 159) remain the key triggers.
Fed Year-End Rate Probability Distribution
| Fed Funds Range | Scenario | Probability |
|---|---|---|
| 3.25-3.50% | Two cuts — requires quick war resolution + labor crack | ~15% |
| 3.50-3.75% | Unchanged — paralysis / protracted conflict | ~45% |
| 3.75-4.00% | One hike — sustained energy shock + re-acceleration | ~30% |
| 4.00%+ | Two hikes — full escalation, breakeven de-anchoring | ~10% |
Modal outcome is unchanged, but the mean is slightly above current levels — the hike tail is fatter than the cut tail. This is consistent with current market pricing.
The Warsh Variable
Powell’s chair term expires May 15. Kevin Warsh’s confirmation is delayed by Senate disputes. This creates a 2-3 month governance vacuum where the Fed is unlikely to take bold action. The April 29 meeting is almost certainly a hold. June 17 is the first where Warsh could plausibly chair — but a new chair’s first meeting is never one where they make a move. Practically, the earliest the Fed does anything is July at the soonest, more likely September.
Warsh faces an immediate tension: establishing hawk credibility (the Volcker playbook) vs. satisfying the political principal who demands cuts. Our read: his first instinct will be to hold and signal inflation seriousness. But if UE hits 5%+ by summer, he has cover to cut framing it as dual-mandate response. The key tell: his first public speech as chair.
Emerging Risks
1. Hormuz Duration Risk: Brent at $105 today with both the US and Iran enforcing competing blockades. US-Iran talks in Islamabad this weekend are the first real diplomatic channel, but Iran has signaled no formal negotiations are planned. Analysts warn that even if the strait reopens, normalizing supply flows could take months. The energy tax on consumers is already exceeding $500B annualized.
2. European Energy Contagion: TTF nat gas at €68/MWh — highest in 3+ years — after strikes on Ras Laffan. Europe’s LNG dependency on Qatar makes it acutely vulnerable. If prices persist above €60 for two quarters, the ECB’s easing cycle is dead and industrial recession in Germany deepens.
3. Fed Governance Gap: The Powell-to-Warsh transition creates maximum policy uncertainty during a period that demands clarity. The DOJ investigation into Powell adds a personal dimension — he stated he has “no intention of leaving the board until the investigation is well and truly over.” This is unprecedented institutional friction at the world’s most important central bank.
4. Labor Market Crack Risk: Powell said job creation has slowed to “essentially zero.” The Fed projects 4.4% UE year-end, but if we print 5%+ by summer, the entire rate calculus flips. This is the downside scenario bond bulls are waiting for — and it’s not crazy given the hiring freeze Powell described.
5. Rates Vol Underpriced: The combination of a leadership transition, an active war with uncertain duration, an energy shock of unknown magnitude, and a softening labor market creates an unusually wide confidence interval around the rate path. When the central bank doesn’t know, the right position is owning optionality, not picking a direction.
Cambridge Sigma provides macro risk intelligence for institutional investors. This analysis reflects conditions as of April 25, 2026. Not investment advice.