The Iran war has disrupted the Federal Reserve's strategy; will the specter of "holding back" return to Wall Street?
2026-03-17 09:26:44
The Federal Reserve's two-day policy meeting, which begins this Wednesday (March 18), will be held amidst the fog of the global energy crisis and geopolitical conflicts. The war in Iran has disrupted one-fifth of the world's oil supply, severely interfering with officials' assessments of the economic outlook.
They need to assess whether the conflict will disrupt economic growth, lead to persistently high inflation, or create a complex stagflation situation of "economic slowdown + rising prices." The post-pandemic supply shock has already prevented the Federal Reserve from achieving its 2% inflation target for five consecutive years, and this week it is more likely to adopt a cautious or even hawkish stance.
The current inflation rate is about one percentage point above the target and faces the risk of further increases—oil prices have surged by nearly 50% in two weeks.
Deutsche Bank economists point out that a question that was unthinkable two weeks ago is now sparking heated debate: Will the Federal Reserve raise interest rates in 2026? Although some policymakers were prepared to put the possibility of raising rates on the table at the last meeting, the threshold for raising rates remains extremely high unless inflation expectations are clearly out of control.
The energy shock has spread from gasoline and jet fuel to transportation, chemicals, manufacturing, and agriculture, pushing up core inflation and the cost of living.
Deutsche Bank points out that persistently high oil prices may force the Federal Reserve to reassess its policy path. Discussions of a 2026 rate hike have shifted from "unimaginable" to "possible option," but the actual triggering conditions are stringent: inflation expectations must be significantly out of control, the wage-price spiral must be rising, and a long-term supply shock must evolve into structural inflation.
The market is still primarily focused on "higher and longer rates," with expectations for rate cuts shifting significantly to later periods. There is a 99.4% probability that rates will remain unchanged at next week's meeting.
U.S. gasoline retail prices have risen nearly 25% in two weeks, reaching their highest level since October 2023. Energy Secretary Chris Wright predicts the conflict will end within weeks, and prices will fall once supply rebounds.
However, Trump has not yet clearly stated a goal or timetable for ending the war, and Federal Reserve officials still need to submit new economic forecasts to make the best judgment. The uncertainty of the war makes forecasting extremely difficult, and the market lacks confidence that it will "end in a few weeks."
Analysts point out that the current situation is volatile, with the United States becoming a participant in the conflict, and a significant portion of global oil transportation has been disrupted.
The Federal Reserve is less making predictions and more discussing different scenarios: Baseline scenario: short-lived conflict, rapid decline in oil prices; Disruptive scenario: prolonged standoff, continued supply disruptions, and a double whammy of deteriorating inflation and growth.
The head of research at Societe Generale said that as the conflict continues, the economic outlook has become more uncertain, and inflation and labor market conditions make it difficult for the Federal Reserve to balance its dual mandate (price stability and full employment).
The Federal Reserve is expected to keep interest rates unchanged at its meeting this week. Given the high degree of uncertainty, the simplest approach might be to stick to the forecast from last December—that there will only be one rate cut in 2026.
After experiencing a series of shocks including the pandemic, soaring inflation, rapid interest rate hikes, and adjustments to Trump's policies, it remains to be seen whether the energy crisis will be the "last straw" that breaks the economy. The market has significantly postponed its expectations for interest rate cuts, with the probability of no change in rates in June rising to 57.3%.
The energy crisis is becoming the biggest source of uncertainty for the Federal Reserve. Continued high oil prices will push up inflation expectations, limit room for interest rate cuts, and simultaneously dampen consumption and investment, amplifying the risk of an economic slowdown.
If the conflict drags on, the probability of stagflation increases significantly. The Federal Reserve will face a difficult balance between persistent inflation and weak growth, and any hawkish shift will exacerbate the tightening of financial conditions.
Investors should be wary of changes in this week's meeting statement and dot plot, paying close attention to officials' assessments of the persistence of the energy shock. Short-term volatility is extremely high, while the medium- to long-term outlook depends on the course of the conflict and the speed of supply recovery.
The Iran war has disrupted the Federal Reserve's interest rate decision, and officials face the dual challenges of inflation and growth. Oil prices have surged nearly 50% in two weeks, potentially pushing inflation even higher; Deutsche Bank points out that a 2026 interest rate hike is now a possibility. Average gasoline prices have risen nearly 25% in two weeks, with the Energy Secretary predicting the increase will end within weeks, but Trump has not specified a target or timeline.
The Federal Reserve is expected to maintain its current forecast, sticking with its December projections. The current situation is volatile, with scenario analysis dominating: a short-term versus long-term standoff. An energy crisis could be the "last straw," increasing the risk of stagflation. Investors should pay close attention to the Fed's statement, dot plot, and officials' assessments of the energy shock; any hawkish signals could trigger sharp corrections.
They need to assess whether the conflict will disrupt economic growth, lead to persistently high inflation, or create a complex stagflation situation of "economic slowdown + rising prices." The post-pandemic supply shock has already prevented the Federal Reserve from achieving its 2% inflation target for five consecutive years, and this week it is more likely to adopt a cautious or even hawkish stance.
Oil prices surge nearly 50% in two weeks, raising concerns about further inflation.
The current inflation rate is about one percentage point above the target and faces the risk of further increases—oil prices have surged by nearly 50% in two weeks.
Deutsche Bank economists point out that a question that was unthinkable two weeks ago is now sparking heated debate: Will the Federal Reserve raise interest rates in 2026? Although some policymakers were prepared to put the possibility of raising rates on the table at the last meeting, the threshold for raising rates remains extremely high unless inflation expectations are clearly out of control.
The energy shock has spread from gasoline and jet fuel to transportation, chemicals, manufacturing, and agriculture, pushing up core inflation and the cost of living.
Deutsche Bank: A rate hike in 2026 is on the table, but the hurdles are extremely high.
Deutsche Bank points out that persistently high oil prices may force the Federal Reserve to reassess its policy path. Discussions of a 2026 rate hike have shifted from "unimaginable" to "possible option," but the actual triggering conditions are stringent: inflation expectations must be significantly out of control, the wage-price spiral must be rising, and a long-term supply shock must evolve into structural inflation.
The market is still primarily focused on "higher and longer rates," with expectations for rate cuts shifting significantly to later periods. There is a 99.4% probability that rates will remain unchanged at next week's meeting.
Gasoline prices have risen nearly 25% in two weeks, and the Energy Minister predicts the rally will end within weeks.
U.S. gasoline retail prices have risen nearly 25% in two weeks, reaching their highest level since October 2023. Energy Secretary Chris Wright predicts the conflict will end within weeks, and prices will fall once supply rebounds.
However, Trump has not yet clearly stated a goal or timetable for ending the war, and Federal Reserve officials still need to submit new economic forecasts to make the best judgment. The uncertainty of the war makes forecasting extremely difficult, and the market lacks confidence that it will "end in a few weeks."
Scenario Analysis Dominance: Short-Term vs. Long-Term Standoff
Analysts point out that the current situation is volatile, with the United States becoming a participant in the conflict, and a significant portion of global oil transportation has been disrupted.
The Federal Reserve is less making predictions and more discussing different scenarios: Baseline scenario: short-lived conflict, rapid decline in oil prices; Disruptive scenario: prolonged standoff, continued supply disruptions, and a double whammy of deteriorating inflation and growth.
The head of research at Societe Generale said that as the conflict continues, the economic outlook has become more uncertain, and inflation and labor market conditions make it difficult for the Federal Reserve to balance its dual mandate (price stability and full employment).
It is expected to remain unchanged, following the forecast of only one decrease in December last year.
The Federal Reserve is expected to keep interest rates unchanged at its meeting this week. Given the high degree of uncertainty, the simplest approach might be to stick to the forecast from last December—that there will only be one rate cut in 2026.
After experiencing a series of shocks including the pandemic, soaring inflation, rapid interest rate hikes, and adjustments to Trump's policies, it remains to be seen whether the energy crisis will be the "last straw" that breaks the economy. The market has significantly postponed its expectations for interest rate cuts, with the probability of no change in rates in June rising to 57.3%.
Energy crisis becomes the final straw, risk rising.
The energy crisis is becoming the biggest source of uncertainty for the Federal Reserve. Continued high oil prices will push up inflation expectations, limit room for interest rate cuts, and simultaneously dampen consumption and investment, amplifying the risk of an economic slowdown.
If the conflict drags on, the probability of stagflation increases significantly. The Federal Reserve will face a difficult balance between persistent inflation and weak growth, and any hawkish shift will exacerbate the tightening of financial conditions.
Investors should be wary of changes in this week's meeting statement and dot plot, paying close attention to officials' assessments of the persistence of the energy shock. Short-term volatility is extremely high, while the medium- to long-term outlook depends on the course of the conflict and the speed of supply recovery.
Editor's Summary
The Iran war has disrupted the Federal Reserve's interest rate decision, and officials face the dual challenges of inflation and growth. Oil prices have surged nearly 50% in two weeks, potentially pushing inflation even higher; Deutsche Bank points out that a 2026 interest rate hike is now a possibility. Average gasoline prices have risen nearly 25% in two weeks, with the Energy Secretary predicting the increase will end within weeks, but Trump has not specified a target or timeline.
The Federal Reserve is expected to maintain its current forecast, sticking with its December projections. The current situation is volatile, with scenario analysis dominating: a short-term versus long-term standoff. An energy crisis could be the "last straw," increasing the risk of stagflation. Investors should pay close attention to the Fed's statement, dot plot, and officials' assessments of the energy shock; any hawkish signals could trigger sharp corrections.
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