The Federal Reserve faces a "stagflation crisis"! Oil supply disruptions completely rewrite expectations for interest rate cuts.
2026-03-18 09:52:37
The Federal Open Market Committee (FOMC) of the Federal Reserve will begin its two-day policy meeting this Wednesday (March 18) to discuss whether to adjust the benchmark interest rate. The US-Israel war against Iran has disrupted one-fifth of the world's oil supply, causing oil prices to fluctuate at high levels, and the energy shock is distorting the economic landscape.
Federal Reserve officials need to assess whether the conflict could disrupt growth, cause persistently high inflation, or create a complex situation of "slowing growth + rising inflation." The post-pandemic supply shock has prevented the Fed from achieving its 2% inflation target for five consecutive years, and the market currently expects a more cautious or even hawkish stance this week.
According to the CME FedWatch tool, the probability of the interest rate remaining unchanged at 3.5%-3.75% this week is as high as 98.9%, the probability of a 25 basis point rate cut is 0%, and the probability of a 25 basis point rate hike has reached an unusually high 1.1% (the first time a rate hike has been priced in this cycle).
By April, the probability of keeping rates unchanged was 95.9%; by June, the probability of keeping rates unchanged was 78.1%. Market bets on a rate cut in 2026 have been significantly reduced, reflecting that soaring oil prices and inflation concerns have reshaped expectations for the rate path.
Oil prices have surged nearly 50% in two weeks. The U.S. Energy Secretary predicts the conflict will end within weeks and prices will fall after supply rebounds, but Trump has not specified a target or timeline. Federal Reserve officials are required to submit new economic projections to make the best judgment.
Most current data do not yet reflect the impact of the Middle East conflict. The energy shock has spread from gasoline and aviation fuel to transportation, chemicals, manufacturing and agriculture, pushing up core inflation and the cost of living.
The Federal Reserve faces a stagflation-like dilemma: the energy shock is driving up inflation and requires tightening measures, but at the same time, it needs easing to curb growth and employment.
The February jobs report showed that U.S. employers unexpectedly lost 92,000 jobs, a rare negative growth in recent times. Key inflation indicators rebounded in January, coupled with soaring oil prices, reigniting inflationary pressures.
The Federal Reserve's dual mandate (price stability and full employment) is once again caught in a dilemma: weak employment requires easing support, while rising inflation requires tightening to anchor expectations. Maintaining the status quo is the simplest option in the short term, and hawkish signals can help prevent inflation expectations from spiraling out of control.
The Federal Reserve needs to balance price stability and full employment. Energy shocks are pushing up inflation (requiring tightening), but simultaneously suppressing growth and employment (requiring easing). Too rapid easing could repeat the runaway inflation seen in 2021-2022; premature tightening would exacerbate the risk of an economic slowdown.
Current market pricing tends to be cautious, and maintaining the status quo is the simplest option. The market has already priced in a "higher and longer" path, and short-term financial conditions are tightening.
Chief Judge James Boasberg of the U.S. District Court for the District of Columbia ruled the Justice Department's subpoena invalid, stating that the investigation lacked legitimate law enforcement purpose and was motivated by "malice or harassment." The Justice Department plans to appeal.
Powell publicly called the investigation a "political weapon," intended as retaliation for the Federal Reserve's independent interest rate setting. The investigation may be crucial to Warsh's nomination and the transition of leadership at the Federal Reserve, increasing the likelihood of Powell's continued tenure.
U.S. Energy Secretary Wright predicted the U.S.-Iran conflict would end within weeks, leading to a rebound in supply and a drop in oil prices. However, Trump has not specified a clear goal or timeline for ending the conflict, Iran has refused to negotiate, the Revolutionary Guard continues its retaliation, and there are no signs of the Strait of Hormuz being restored.
Market confidence in a "weeks-long end" scenario is weak, with a greater inclination to bet on a longer-term disruption. The Federal Reserve needs to make judgments amidst high uncertainty, with scenario analysis dominating: a short-term versus a long-term standoff.
The market is most focused on the policy statement, the Summary of Economic Projections (SEP), and the assessment of the impact of the Middle East conflict in the dot plot. The tone of Powell's press conference will be crucial: how he describes the persistence of inflation, growth risks, and energy shocks will determine the market's repricing of the interest rate path.
If the emphasis is on "seeing through the supply shock," expectations of interest rate cuts may be restarted; if inflation concerns are amplified, tightening expectations will be further strengthened. Short-term volatility is extremely high, and investors need to carefully interpret any changes in wording.
The Federal Reserve is expected to hold rates steady at its meeting this week, with a 98.9% probability of maintaining the current 3.5%-3.75% rate. The market has unusually priced in a 1.1% rate hike. The Iran war has led to high oil prices and renewed inflationary pressures, further complicating the Fed's dual mandate. February's unexpected job losses of 92,000 and January's rising inflation indicators suggest the energy shock has not yet been fully reflected in the data. The Energy Secretary predicts the crisis will end within weeks, but uncertainty makes forecasting extremely difficult.
The policy statement, summary of economic projections, and dot plot's assessment of the impact of the Middle East conflict will be the focus. Powell's press conference tone will dictate the market's repricing of the interest rate path. Short-term volatility is extremely high; investors should be wary of any hawkish signals that could trigger further tightening of financial conditions, and pay close attention to inflation data and geopolitical developments.
Federal Reserve officials need to assess whether the conflict could disrupt growth, cause persistently high inflation, or create a complex situation of "slowing growth + rising inflation." The post-pandemic supply shock has prevented the Fed from achieving its 2% inflation target for five consecutive years, and the market currently expects a more cautious or even hawkish stance this week.
The probability of interest rates remaining unchanged this week is as high as 98.9%.
According to the CME FedWatch tool, the probability of the interest rate remaining unchanged at 3.5%-3.75% this week is as high as 98.9%, the probability of a 25 basis point rate cut is 0%, and the probability of a 25 basis point rate hike has reached an unusually high 1.1% (the first time a rate hike has been priced in this cycle).
By April, the probability of keeping rates unchanged was 95.9%; by June, the probability of keeping rates unchanged was 78.1%. Market bets on a rate cut in 2026 have been significantly reduced, reflecting that soaring oil prices and inflation concerns have reshaped expectations for the rate path.
Inflationary pressures have reignited, and supply shocks are not reflected in most data.
Oil prices have surged nearly 50% in two weeks. The U.S. Energy Secretary predicts the conflict will end within weeks and prices will fall after supply rebounds, but Trump has not specified a target or timeline. Federal Reserve officials are required to submit new economic projections to make the best judgment.
Most current data do not yet reflect the impact of the Middle East conflict. The energy shock has spread from gasoline and aviation fuel to transportation, chemicals, manufacturing and agriculture, pushing up core inflation and the cost of living.
The Federal Reserve faces a stagflation-like dilemma: the energy shock is driving up inflation and requires tightening measures, but at the same time, it needs easing to curb growth and employment.
Nonfarm payrolls unexpectedly fell by 92,000 in February, while inflation indicators rebounded in January.
The February jobs report showed that U.S. employers unexpectedly lost 92,000 jobs, a rare negative growth in recent times. Key inflation indicators rebounded in January, coupled with soaring oil prices, reigniting inflationary pressures.
The Federal Reserve's dual mandate (price stability and full employment) is once again caught in a dilemma: weak employment requires easing support, while rising inflation requires tightening to anchor expectations. Maintaining the status quo is the simplest option in the short term, and hawkish signals can help prevent inflation expectations from spiraling out of control.
The Federal Reserve's dual mandate is once again caught in a dilemma, with a cautiously hawkish stance prevailing in the short term.
The Federal Reserve needs to balance price stability and full employment. Energy shocks are pushing up inflation (requiring tightening), but simultaneously suppressing growth and employment (requiring easing). Too rapid easing could repeat the runaway inflation seen in 2021-2022; premature tightening would exacerbate the risk of an economic slowdown.
Current market pricing tends to be cautious, and maintaining the status quo is the simplest option. The market has already priced in a "higher and longer" path, and short-term financial conditions are tightening.
The judge ruled the Justice Department's subpoena invalid, hindering Powell's investigation.
Chief Judge James Boasberg of the U.S. District Court for the District of Columbia ruled the Justice Department's subpoena invalid, stating that the investigation lacked legitimate law enforcement purpose and was motivated by "malice or harassment." The Justice Department plans to appeal.
Powell publicly called the investigation a "political weapon," intended as retaliation for the Federal Reserve's independent interest rate setting. The investigation may be crucial to Warsh's nomination and the transition of leadership at the Federal Reserve, increasing the likelihood of Powell's continued tenure.
The US Energy Secretary predicted the event would end within weeks, but uncertainty makes forecasting extremely difficult.
U.S. Energy Secretary Wright predicted the U.S.-Iran conflict would end within weeks, leading to a rebound in supply and a drop in oil prices. However, Trump has not specified a clear goal or timeline for ending the conflict, Iran has refused to negotiate, the Revolutionary Guard continues its retaliation, and there are no signs of the Strait of Hormuz being restored.
Market confidence in a "weeks-long end" scenario is weak, with a greater inclination to bet on a longer-term disruption. The Federal Reserve needs to make judgments amidst high uncertainty, with scenario analysis dominating: a short-term versus a long-term standoff.
Policy statements and economic forecasts take center stage; assessment of the impact of the Middle East conflict is key.
The market is most focused on the policy statement, the Summary of Economic Projections (SEP), and the assessment of the impact of the Middle East conflict in the dot plot. The tone of Powell's press conference will be crucial: how he describes the persistence of inflation, growth risks, and energy shocks will determine the market's repricing of the interest rate path.
If the emphasis is on "seeing through the supply shock," expectations of interest rate cuts may be restarted; if inflation concerns are amplified, tightening expectations will be further strengthened. Short-term volatility is extremely high, and investors need to carefully interpret any changes in wording.
Editor's Summary
The Federal Reserve is expected to hold rates steady at its meeting this week, with a 98.9% probability of maintaining the current 3.5%-3.75% rate. The market has unusually priced in a 1.1% rate hike. The Iran war has led to high oil prices and renewed inflationary pressures, further complicating the Fed's dual mandate. February's unexpected job losses of 92,000 and January's rising inflation indicators suggest the energy shock has not yet been fully reflected in the data. The Energy Secretary predicts the crisis will end within weeks, but uncertainty makes forecasting extremely difficult.
The policy statement, summary of economic projections, and dot plot's assessment of the impact of the Middle East conflict will be the focus. Powell's press conference tone will dictate the market's repricing of the interest rate path. Short-term volatility is extremely high; investors should be wary of any hawkish signals that could trigger further tightening of financial conditions, and pay close attention to inflation data and geopolitical developments.
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