Mortgage rates jumped sharply this week. The housing market faces fresh pressure just as it seemed to stabilize.

The Big Picture The Federal Reserve may not cut interest rates at all in 2026. Chair Jerome Powell said it's "way too early" to judge the full impact of the U.S.-Israel war with Iran on inflation. The conflict, which began February 28, has halted shipping through the Strait of Hormuz and sent oil prices soaring.

In the U.S., average gas prices have jumped roughly a dollar over the last month and are quickly approaching $4 per gallon. This energy shock follows multiple years of elevated inflation, worrying Fed officials about potential increases in longer-term inflation expectations.

“"It's one of those times where you get a series of supply shocks: first the pandemic, then the much smaller one from tariffs, and then we're getting now an energy shock," Powell said.”

Why It Matters Mortgage rates are already reacting. According to Freddie Mac, rates averaged **6.38%** last week, up from a three-year low of **5.98%** in February. The increase reflects concern that the oil shock will spark renewed inflation, forcing the Fed to delay further rate cuts or possibly raise rates.

Bond markets now assess a 77% probability that the Fed's benchmark rate will be the same in December as it is today, in a range of 3.5% to 3.75%. Before the war, markets had expected one or two cuts this year. On prediction marketplace Polymarket, traders see a 34% chance the Fed makes no rate cut in 2026, up from just 10% before the war began.

Fed Governor Michael Barr warned that yet another price shock after five years of elevated inflation could increase longer-term inflation expectations. "Consumers and businesses factor future inflation into their current economic decisions, so there is a risk that this dynamic could lead to inflation persistence," he said.