Interest rate tools are starting to fail! The Fed's focus is shifting to quantitative tools.
2026-03-16 21:06:09
The Federal Reserve is no stranger to oil shocks, but the current global energy crisis triggered by the conflict with Iran is testing the central bank's policy wisdom with an intensity not seen in decades. At present, it seems that no matter how the Fed moves interest rates, it is not a good option. Naturally, the market's attention may now shift to the Fed's quantitative policies.
On March 18, the Federal Open Market Committee (FOMC) will conclude its two-day policy meeting, finalizing the next path of U.S. monetary policy amid the triple pressures of rising inflation, slowing economy, and political uncertainty.
The unique nature of this crisis is self-evident. The Trump administration's military action against Iran triggered a global oil market surge, with the US benchmark West Texas Intermediate (WTI) crude oil price briefly rising to $120 per barrel, a recent peak.
The Strait of Hormuz, controlled by Iran, carries 20% of the world's oil shipments. The current disruption to shipping through the strait has caused dramatic fluctuations in oil prices, with an impact far exceeding that of the 1973 Arab-Israeli War. Cornell University professor Nicholas Moore points out that the current oil production shutdown in the Gulf is 20 million barrels per day, several times more than the 4.5 million barrels per day of that year.
As the world's leading oil producer, the United States has reduced its dependence on imported crude oil and its economic structure is dominated by the service sector. However, the recovery period for energy infrastructure after being hit by the real economy is long, and coupled with the transmission effect of the supply chain, this makes inflationary pressures more persistent.
The contradictory state of the economic fundamentals has further exacerbated the policy difficulties. Data from the U.S. Bureau of Labor Statistics shows that the labor market is showing a clear divergence: the number of new non-farm jobs in January was revised down to 126,000, but unexpectedly decreased by 92,000 in February, and the unemployment rate rose from 4.3% in January to 4.4%.
Although the Consumer Price Index (CPI) inflation fell to 2.4% in January and February, it did not reflect the lagged effects of soaring oil prices. Meanwhile, the Fed’s core PCE price index rose 3.1% year-on-year in January, a new high in more than a year.
Meanwhile, the U.S. Bureau of Economic Analysis revised its GDP growth forecast for the fourth quarter of 2025 down to 0.7% from 1.4%, a significant drop from the 4.4% growth rate in the third quarter, and the risk of stagflation has once again become the focus of the market.
Wells Fargo economists bluntly stated that the combination of high inflation and weak employment is the Federal Reserve's "biggest nightmare," which directly conflicts with the central bank's dual mission of stabilizing prices and achieving full employment.
The Federal Reserve's policy dilemma is essentially a choice between two options under supply shocks.
Boston College professor Brian Bethune points out that both tariffs and rising oil prices are typical supply shocks, which can simultaneously push up inflation and suppress employment, leaving interest rate policy in a situation where there are "no shortcuts."
Liz Thomas, head of investment strategy at SoFi, further analyzed that the Federal Reserve lacks the policy tools to address both sticky inflation and weak employment, and is forced to weigh the two major goals.
The market generally expects the FOMC to maintain the benchmark interest rate range of 3.5%-3.75% at its March and April meetings, with the probability of a summer rate cut gradually increasing. However, the opposition from hawkish members cannot be ignored. At the January meeting, Federal Reserve Governors Stephen Milan and Christopher Waller voted against maintaining the interest rate unchanged. The fact that inflation has been above 2% for six consecutive years has made some members wary of any easing tendencies.
The duration and scope of impact of geopolitical conflicts have become key variables in breaking the deadlock.
Matt Dizok, head of fixed income strategy at Bank of America Merrill Lynch, said the futures market is pricing current oil price fluctuations as short-term disturbances, which gives the Federal Reserve room to wait and see. However, if the conflict in Iran continues to escalate, it could trigger broader supply chain disruptions.
Despite the release of strategic oil reserves by many countries—Japan releasing a record 80 million barrels in a single instance, and member countries of the International Energy Agency (IEA) jointly releasing 400 million barrels—experts believe that these measures can only alleviate the short-term supply and demand gap and are unlikely to fundamentally change the tense situation in the energy market.
More noteworthy is that the alignment of positions between Russia and Iran could prolong the conflict, while the policy option of easing sanctions on Russian oil would have limited effect due to the possibility of exacerbating geopolitical risks.
To make matters worse, the Federal Reserve is facing unprecedented political uncertainty. Current Chairman Jerome Powell's term ends in May, and former Fed Governor Kevin Walsh, nominated by Trump, awaits Senate confirmation. However, Republican Senator Thom Tillis has vowed to block all Fed nominations, citing the Justice Department's investigation into Powell.
Although a federal judge has dismissed the subpoenas, finding the allegations "lacking substantial evidence," the Justice Department plans to appeal, further delaying the nomination process.
Meanwhile, the legal case involving Federal Reserve Governor Lisa Cook, who is accused of mortgage fraud, is still being heard by the Supreme Court and no final ruling has been made yet.
This political maneuvering puts the Federal Reserve's policy independence to the test and makes any interest rate adjustment decision fall into a more complex public opinion environment.
Looking back at history, the Federal Reserve experienced stagflation during the 1970s oil crisis due to policy swings, and now it needs to learn lessons under a completely different economic structure.
Currently, the US economy has significantly improved its resilience to energy shocks, but the intensity and uncertainty of this crisis should not be underestimated.
It is worth noting that in wars, the side with the advantage usually has a wider range of interest rate policies to choose from, while the side at a disadvantage usually chooses to raise interest rates, restrict foreign exchange, and restrict withdrawals to prevent capital outflows, currency devaluation, and hyperinflation. The side with the advantage mainly considers controlling the cost of issuing debt and maintaining a good relationship between inflation and economic development as much as possible without government bankruptcy. In this case, the Federal Reserve will play the role of this balancer.
The market's focus is not only on the March interest rate decision itself, but also on the FOMC members' latest forecasts on interest rate path, inflation and economic growth in the concurrently released "Economic Outlook Summary".
A research report from CITIC Securities points out that the Federal Reserve's current policy stance is "waiting for more clear signals," and the number of rate cuts this year may not exceed [number missing].
Secondly, any deviation from expected inflation or employment data could trigger policy adjustments.
In theory, during wartime, interest rate policies can change or remain the same, and both raising and lowering interest rates have been used. However, the basic approach is to print money to buy government bonds. As the dominant party in the war, the United States does not need to specifically raise interest rates to prevent capital outflow. It only needs to consider inflation, economic growth, and government borrowing costs. Currently, government borrowing costs and inflation are both high while the economy is cooling down. This is a test for the Federal Reserve.
Lowering interest rates can reduce the cost of US government debt issuance, but it may rapidly drive up housing prices, stock prices, and raw material prices, ultimately leading to rampant speculation, preventing funds from flowing into the real economy, causing production costs for manufacturing companies to skyrocket, resulting in a surplus of money and a shortage of goods, and reigniting inflation.
Raising interest rates would be even more terrifying, potentially causing the real estate sector to break its funding chain, while simultaneously leading to a stock market crash, tight corporate funds, and a further increase in the unemployment rate.
Therefore, the US will most likely keep interest rates unchanged and issue Treasury bonds. The government will then use the large amount of money raised from these bonds for government procurement, with the cash flowing into the military, military factories, and other places, eventually entering the market and driving up overall inflation in the US economy.
Therefore, the market's attention may be shifting from price policies such as interest rates to quantity policies such as how much debt to issue. This test, which is intertwined with the oil crisis and political games, is pushing the Federal Reserve to a historical crossroads.
For global financial markets, whether the Federal Reserve can uphold its price stability goal while preventing an economic recession, and whether it can maintain the independence of its monetary policy under political pressure, will be the core variables determining the trend of global capital flows and asset prices in the next six months.
As MetLife investment management expert Taki Tanii stated, the rise in inflation triggered by the war is a foregone conclusion, but the ultimate impact will depend on whether the Federal Reserve can learn from history and find a precise policy balance amidst multiple contradictions.
On March 18, the Federal Open Market Committee (FOMC) will conclude its two-day policy meeting, finalizing the next path of U.S. monetary policy amid the triple pressures of rising inflation, slowing economy, and political uncertainty.
Energy crisis escalates: Impact reaches its worst level in decades
The unique nature of this crisis is self-evident. The Trump administration's military action against Iran triggered a global oil market surge, with the US benchmark West Texas Intermediate (WTI) crude oil price briefly rising to $120 per barrel, a recent peak.
The Strait of Hormuz, controlled by Iran, carries 20% of the world's oil shipments. The current disruption to shipping through the strait has caused dramatic fluctuations in oil prices, with an impact far exceeding that of the 1973 Arab-Israeli War. Cornell University professor Nicholas Moore points out that the current oil production shutdown in the Gulf is 20 million barrels per day, several times more than the 4.5 million barrels per day of that year.
As the world's leading oil producer, the United States has reduced its dependence on imported crude oil and its economic structure is dominated by the service sector. However, the recovery period for energy infrastructure after being hit by the real economy is long, and coupled with the transmission effect of the supply chain, this makes inflationary pressures more persistent.
Economic fundamentals are contradictory: the risk of stagflation is resurfacing.
The contradictory state of the economic fundamentals has further exacerbated the policy difficulties. Data from the U.S. Bureau of Labor Statistics shows that the labor market is showing a clear divergence: the number of new non-farm jobs in January was revised down to 126,000, but unexpectedly decreased by 92,000 in February, and the unemployment rate rose from 4.3% in January to 4.4%.
Although the Consumer Price Index (CPI) inflation fell to 2.4% in January and February, it did not reflect the lagged effects of soaring oil prices. Meanwhile, the Fed’s core PCE price index rose 3.1% year-on-year in January, a new high in more than a year.
Meanwhile, the U.S. Bureau of Economic Analysis revised its GDP growth forecast for the fourth quarter of 2025 down to 0.7% from 1.4%, a significant drop from the 4.4% growth rate in the third quarter, and the risk of stagflation has once again become the focus of the market.
Wells Fargo economists bluntly stated that the combination of high inflation and weak employment is the Federal Reserve's "biggest nightmare," which directly conflicts with the central bank's dual mission of stabilizing prices and achieving full employment.
Policy Dilemma: The Interest Rate Decision-Making Dilemma Under Supply Shocks
The Federal Reserve's policy dilemma is essentially a choice between two options under supply shocks.
Boston College professor Brian Bethune points out that both tariffs and rising oil prices are typical supply shocks, which can simultaneously push up inflation and suppress employment, leaving interest rate policy in a situation where there are "no shortcuts."
Liz Thomas, head of investment strategy at SoFi, further analyzed that the Federal Reserve lacks the policy tools to address both sticky inflation and weak employment, and is forced to weigh the two major goals.
The market generally expects the FOMC to maintain the benchmark interest rate range of 3.5%-3.75% at its March and April meetings, with the probability of a summer rate cut gradually increasing. However, the opposition from hawkish members cannot be ignored. At the January meeting, Federal Reserve Governors Stephen Milan and Christopher Waller voted against maintaining the interest rate unchanged. The fact that inflation has been above 2% for six consecutive years has made some members wary of any easing tendencies.
Key variables: Duration and impact boundaries of geopolitical conflicts
The duration and scope of impact of geopolitical conflicts have become key variables in breaking the deadlock.
Matt Dizok, head of fixed income strategy at Bank of America Merrill Lynch, said the futures market is pricing current oil price fluctuations as short-term disturbances, which gives the Federal Reserve room to wait and see. However, if the conflict in Iran continues to escalate, it could trigger broader supply chain disruptions.
Despite the release of strategic oil reserves by many countries—Japan releasing a record 80 million barrels in a single instance, and member countries of the International Energy Agency (IEA) jointly releasing 400 million barrels—experts believe that these measures can only alleviate the short-term supply and demand gap and are unlikely to fundamentally change the tense situation in the energy market.
More noteworthy is that the alignment of positions between Russia and Iran could prolong the conflict, while the policy option of easing sanctions on Russian oil would have limited effect due to the possibility of exacerbating geopolitical risks.
Political interference: The Fed's independence faces a double test
To make matters worse, the Federal Reserve is facing unprecedented political uncertainty. Current Chairman Jerome Powell's term ends in May, and former Fed Governor Kevin Walsh, nominated by Trump, awaits Senate confirmation. However, Republican Senator Thom Tillis has vowed to block all Fed nominations, citing the Justice Department's investigation into Powell.
Although a federal judge has dismissed the subpoenas, finding the allegations "lacking substantial evidence," the Justice Department plans to appeal, further delaying the nomination process.
Meanwhile, the legal case involving Federal Reserve Governor Lisa Cook, who is accused of mortgage fraud, is still being heard by the Supreme Court and no final ruling has been made yet.
This political maneuvering puts the Federal Reserve's policy independence to the test and makes any interest rate adjustment decision fall into a more complex public opinion environment.
Historical Lessons: The Stagflation Crisis of the 1970s
Looking back at history, the Federal Reserve experienced stagflation during the 1970s oil crisis due to policy swings, and now it needs to learn lessons under a completely different economic structure.
Currently, the US economy has significantly improved its resilience to energy shocks, but the intensity and uncertainty of this crisis should not be underestimated.
It is worth noting that in wars, the side with the advantage usually has a wider range of interest rate policies to choose from, while the side at a disadvantage usually chooses to raise interest rates, restrict foreign exchange, and restrict withdrawals to prevent capital outflows, currency devaluation, and hyperinflation. The side with the advantage mainly considers controlling the cost of issuing debt and maintaining a good relationship between inflation and economic development as much as possible without government bankruptcy. In this case, the Federal Reserve will play the role of this balancer.
The market's focus is not only on the March interest rate decision itself, but also on the FOMC members' latest forecasts on interest rate path, inflation and economic growth in the concurrently released "Economic Outlook Summary".
A research report from CITIC Securities points out that the Federal Reserve's current policy stance is "waiting for more clear signals," and the number of rate cuts this year may not exceed [number missing].
Secondly, any deviation from expected inflation or employment data could trigger policy adjustments.
Crossroads: A Core Variable in Global Financial Markets
In theory, during wartime, interest rate policies can change or remain the same, and both raising and lowering interest rates have been used. However, the basic approach is to print money to buy government bonds. As the dominant party in the war, the United States does not need to specifically raise interest rates to prevent capital outflow. It only needs to consider inflation, economic growth, and government borrowing costs. Currently, government borrowing costs and inflation are both high while the economy is cooling down. This is a test for the Federal Reserve.
Lowering interest rates can reduce the cost of US government debt issuance, but it may rapidly drive up housing prices, stock prices, and raw material prices, ultimately leading to rampant speculation, preventing funds from flowing into the real economy, causing production costs for manufacturing companies to skyrocket, resulting in a surplus of money and a shortage of goods, and reigniting inflation.
Raising interest rates would be even more terrifying, potentially causing the real estate sector to break its funding chain, while simultaneously leading to a stock market crash, tight corporate funds, and a further increase in the unemployment rate.
Therefore, the US will most likely keep interest rates unchanged and issue Treasury bonds. The government will then use the large amount of money raised from these bonds for government procurement, with the cash flowing into the military, military factories, and other places, eventually entering the market and driving up overall inflation in the US economy.
Therefore, the market's attention may be shifting from price policies such as interest rates to quantity policies such as how much debt to issue. This test, which is intertwined with the oil crisis and political games, is pushing the Federal Reserve to a historical crossroads.
For global financial markets, whether the Federal Reserve can uphold its price stability goal while preventing an economic recession, and whether it can maintain the independence of its monetary policy under political pressure, will be the core variables determining the trend of global capital flows and asset prices in the next six months.
As MetLife investment management expert Taki Tanii stated, the rise in inflation triggered by the war is a foregone conclusion, but the ultimate impact will depend on whether the Federal Reserve can learn from history and find a precise policy balance amidst multiple contradictions.
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