The volatility created in global energy markets by the war with Iran in the Middle East could complicate the Fed’s interest rate cut plans. Rising oil and natural gas prices, creating new pressure on inflation, have significantly weakened expectations for an interest rate cut.
Economists expect the Fed to keep its policy interest rate unchanged at its March 18 meeting. However, many analysts had previously predicted a first rate cut in June. The war with Iran, however, has rapidly increased energy prices, leading to a reassessment of these predictions. According to Wall Street analysts, the increase in energy costs could lead to price increases in many areas, including transportation, food, and utilities.
This situation presents a difficult balance for the Fed. On the one hand, the central bank is trying to bring inflation down to its target level of 2% annually, while on the other hand, it has to support a labor market that is showing signs of slowing. The Personal Consumption Expenditures (PCE) index, one of the inflation indicators most closely watched by the Fed, which was released on March 13, showed that prices continued to rise in January. It is noteworthy that this increase occurred before the full impact of the Iran war was felt in energy markets.
According to CME FedWatch data, which is based on futures markets, there is a 99% probability that the Fed will keep interest rates unchanged at 3.5%–3.75% at its March 18 meeting. The same tool calculates a 95% probability that the Fed will not change rates at its April 30 meeting, and a 77% probability at its June meeting. A month ago, these probabilities were 70% and 31%, respectively.
Due to rising energy prices, some economists believe the Fed may not cut interest rates at all this year. EY-Parthenon Chief Economist Gregory Daco stated that they have revised their baseline scenario due to rising inflation expectations, now forecasting only a single 25 basis point rate cut in 2026, likely in December. According to Daco, the possibility of the Fed not cutting rates at all in 2026 cannot be entirely ruled out.
Some analysts go even further, suggesting that the Fed might even raise interest rates in 2026 to control inflation. Sonu Varghese, Chief Macro Strategist at Carson Group, stated that current conditions are already challenging for the Fed, and that if inflationary pressures increase, the central bank might begin discussing rate hikes later in the year instead of cutting them.
Another problem facing the Fed is the weakening labor market. In February, employers in the U.S. laid off 92,000 people, a development considered unexpected by economists. PNC economist Gus Faucher noted that the labor market has been gradually weakening in recent years and that inflation continues to run higher than the Fed would like.
According to Faucher, the fundamental dilemma for the Fed is this: cutting interest rates to support the labor market could accelerate inflation again, while keeping interest rates stable could lead to further weakness in the labor market.
On the other hand, the future leadership of the Fed is also a subject of debate. Gregory Daco stated that if Kevin Warsh is confirmed as Fed chairman, he will need to demonstrate that his monetary policy views are based on economic rather than political grounds.
*This is not investment advice.
