The Middle East upheaval has caused oil prices to soar, putting pressure on assets, but the Federal Reserve's resolve remains unshaken.
2026-03-03 17:21:39
Following the US and Israel's strikes against Iran and the retaliatory responses that triggered a rapid rise in international oil prices and a simultaneous weakening of global stock markets, this geopolitical conflict, which resulted in the death of Iran's Supreme Leader Ayatollah Ali Khamenei and disrupted shipping in the Strait of Hormuz, remains a significant event.
However, this may not have changed the market's core expectations for the upcoming Federal Reserve interest rate decision—the mainstream view is that the conflict will have a very limited impact on the Federal Open Market Committee (FOMC) interest rate decision on March 17-18.
As a provider of 4% of the world's crude oil supply and controlling the Strait of Hormuz, a vital energy transport chokepoint, the conflict with Iran has directly driven up U.S. gasoline prices, reversing consumers' previous expectations of lower oil prices.
However, there are no signs of panic in the short term. People will most likely just fill up their tanks, and there will be no rush to buy gasoline or groceries, nor will there be a repeat of the long queues at gas stations during the pandemic.
From a risk scenario perspective, if the conflict lasts only 4-5 weeks and is quickly resolved, the rise in oil prices will only be a short-term phenomenon.
If the conflict continues to escalate, it could trigger a surge in energy prices, increasing the risk of stagflation in the United States.
The conflict has already had an initial impact on the global supply chain: FedEx has suspended flights to and from several Middle Eastern countries for security reasons, and its air cargo network is tightening; rising energy prices will gradually be passed on to end consumers through raw material costs.
However, the global oil market is currently in a state of oversupply, coupled with structural changes such as the United States becoming a net oil exporter and a decline in economic energy intensity, giving the market strong resilience.
Historical experience also shows that most geopolitical shocks only bring short-term oil price spikes and have a limited impact on the overall market.
The current rise in oil prices is essentially a supply-side shock rather than an overheated aggregate demand, which is exactly the type of situation the Federal Reserve tends to downplay when setting interest rate policies.
Tom Polcelli, chief economist at Wells Fargo, pointed out that while rising oil prices will push up overall inflation, tightening monetary policy will have little effect on such inflation and will instead further suppress economic growth.
Internal research by the Federal Reserve has also shown that supply-side disruptions such as the Russia-Ukraine conflict were the main cause of the previous surge in inflation, and the Fed is now more cautious in its policy response to such temporary shocks.
The Federal Reserve will use the window of opportunity before its March policy meeting to assess whether the conflict is a short-lived oil price surge or a new driver of sustained inflation.
Most institutions believe that only a prolonged conflict and a sustained major disruption in the Strait of Hormuz, leading to persistently high energy prices, could cause inflation expectations to decouple, forcing the Federal Reserve to adjust its policies.
In the short term, the Federal Reserve will adhere to the principle of data dependence and maintain a wait-and-see attitude.
As of March 2, market institutions have reached a clear consensus that the FOMC will maintain the benchmark interest rate range of 3.5%-3.75% at its meeting on March 17-18.
The significant increase in geopolitical uncertainty has further reinforced the Federal Reserve's policy stance of "holding steady." Supply-side disruptions caused by the US-Iran conflict will only increase market volatility in the short term, and are unlikely to shake the Fed's core policy resolve.
However, this may not have changed the market's core expectations for the upcoming Federal Reserve interest rate decision—the mainstream view is that the conflict will have a very limited impact on the Federal Open Market Committee (FOMC) interest rate decision on March 17-18.
Conflict Impacts Markets: Oil Prices Rise, Consumption Impact Manageable
As a provider of 4% of the world's crude oil supply and controlling the Strait of Hormuz, a vital energy transport chokepoint, the conflict with Iran has directly driven up U.S. gasoline prices, reversing consumers' previous expectations of lower oil prices.
However, there are no signs of panic in the short term. People will most likely just fill up their tanks, and there will be no rush to buy gasoline or groceries, nor will there be a repeat of the long queues at gas stations during the pandemic.
From a risk scenario perspective, if the conflict lasts only 4-5 weeks and is quickly resolved, the rise in oil prices will only be a short-term phenomenon.
If the conflict continues to escalate, it could trigger a surge in energy prices, increasing the risk of stagflation in the United States.
Supply chain disruptions emerge: Energy and shipping under pressure, but the market remains resilient.
The conflict has already had an initial impact on the global supply chain: FedEx has suspended flights to and from several Middle Eastern countries for security reasons, and its air cargo network is tightening; rising energy prices will gradually be passed on to end consumers through raw material costs.
However, the global oil market is currently in a state of oversupply, coupled with structural changes such as the United States becoming a net oil exporter and a decline in economic energy intensity, giving the market strong resilience.
Historical experience also shows that most geopolitical shocks only bring short-term oil price spikes and have a limited impact on the overall market.
The Federal Reserve's policy logic: Supply-side shocks are tended to be "downplayed."
The current rise in oil prices is essentially a supply-side shock rather than an overheated aggregate demand, which is exactly the type of situation the Federal Reserve tends to downplay when setting interest rate policies.
Tom Polcelli, chief economist at Wells Fargo, pointed out that while rising oil prices will push up overall inflation, tightening monetary policy will have little effect on such inflation and will instead further suppress economic growth.
Internal research by the Federal Reserve has also shown that supply-side disruptions such as the Russia-Ukraine conflict were the main cause of the previous surge in inflation, and the Fed is now more cautious in its policy response to such temporary shocks.
Key risk boundary: Only prolonged conflict would change the Fed's stance
The Federal Reserve will use the window of opportunity before its March policy meeting to assess whether the conflict is a short-lived oil price surge or a new driver of sustained inflation.
Most institutions believe that only a prolonged conflict and a sustained major disruption in the Strait of Hormuz, leading to persistently high energy prices, could cause inflation expectations to decouple, forcing the Federal Reserve to adjust its policies.
In the short term, the Federal Reserve will adhere to the principle of data dependence and maintain a wait-and-see attitude.
Market consensus: The Federal Reserve will hold rates steady in March.
As of March 2, market institutions have reached a clear consensus that the FOMC will maintain the benchmark interest rate range of 3.5%-3.75% at its meeting on March 17-18.
The significant increase in geopolitical uncertainty has further reinforced the Federal Reserve's policy stance of "holding steady." Supply-side disruptions caused by the US-Iran conflict will only increase market volatility in the short term, and are unlikely to shake the Fed's core policy resolve.
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