Interest Rates Included Amid Iran War, Rates May Rise
Forecasters widely expect the Federal Reserve to keep interest rates unchanged when it concludes its two-day meeting on March 18, as policymakers weigh the economic impact of the ongoing war with Iran.
In addition to the United States fighting back, a lot has happened since the Federal Open Market Committee held the rate steady at 3.5% to 3.75% at its last meeting in January, following three cuts late last year.
The January and February jobs reports from the Bureau of Labor Statistics sent mixed signals about the labor market, with January showing better-than-expected growth and February seeing job losses. CPI inflation has eased since policymakers last met, but economists want to see March data, as the latest figures do not reflect a recent increase in oil prices. A rise in oil prices could move up the supply chain and raise other prices.
Meanwhile, the Bureau of Economic Analysis revised its GDP growth estimate for the fourth quarter of 2025 to 0.7%, down from its initial estimate of 1.4%, and down from 4.4% in the previous quarter.
Now, fears of stagflation are back on the table. Wells Fargo economists, in a March 12 note, called high inflation and a weak labor market the committee’s worst nightmare as it juggles its dual mandate of keeping prices stable and unemployment low.
Where does the job market and inflation stand?
The BLS reported that the US economy added a revised-down 126,000 jobs in January but lost an estimated 92,000 in February. The unemployment rate fell from 4.4% in December to 4.3% in January but returned to 4.4% in February.
The CPI fell from 2.7% in December to 2.4% in January and February. That may be a sign that prices are stabilizing under normal conditions, but it does not reflect the potential inflationary effects of the Iran war. Core PCE, one of the Fed’s favorite measures of inflation, rose 3.1% year-over-year in January, its highest level in more than a year.
Despite all the developments since the last FOMC meeting, Boston College economics professor Brian Bethune said the Fed’s problem has not changed.
“A tariff is an asset shock. Oil prices are an asset shock. Well, guess what? A central banker’s worst nightmare is an asset shock, because you get upward pressure on inflation and downward pressure on employment,” Bethune said. “There is no easy way of rates.”
Liz Thomas, head of investment strategy at SoFi, added that if Fed policymakers are faced with sticky or rising inflation and a weak labor market, “they don’t have a tool that solves both of those things, so they may have to choose which one they want to steer.”
What is the economic impact of the Iran war?
The United States’ decision to go to war continues to roil Wall Street. Iran’s control over the Strait of Hormuz – which transports about 20% of the world’s oil – has stopped most of the traffic, causing oil prices to rise and keep them volatile.
Much of the economic impact of war depends on how long it lasts. US consumers are already paying more at the gas pump, and some companies have added fuel surcharges to their prices.
“The futures market is calling this a near-term disruption,” said Matt Diczok, head of Fixed Income Strategy for the Investment Office at Bank of America and Merrill. “That might give the Fed a little comfort in looking at that.”
Bethune said that while tapping oil reserves would help reduce demand, easing sanctions on Russian oil would have little impact on global oil prices.
“Who does Russia side with? Iran,” Bethune said. “If Russia gives more support to Iran because it has more oil profits, that will make the war last longer.”
Will higher oil prices increase inflation?
Diczok said that for higher oil prices to translate into continued inflation, consumers must continue to buy at the same rate as before, but that usually happens when people feel positive about their job prospects, consumer confidence is high and consumers have good savings.
None of that is true right now, he said.
“Taxes, in our opinion, have not led to a significant or sustained increase in money because they are price increases and people are getting used to knowing how much they are. They are buying fewer things,” said Diczok. “It is possible that a temporary increase in electricity prices will do the same.”
Bethune said it makes sense that although tariffs have led to some price increases passed on to consumers, they have not resulted in the higher levels of inflation that were initially predicted because their implementation has been slower and more volatile than expected. He added that companies have borne many of the remaining costs by adjusting supply chains through hiring and under-renting, which lowers payments without significantly changing consumer behavior.
Now, if oil prices remain high, those companies will face new cost pressures and few, if any, options to replace the oil. The question, Bethune said, is whether they can regain productivity gains from low-wage workers, especially amid growing minimum wages.
When will the Fed adjust rates?
Forecasters predict that the FOMC will keep its rate on hold at its March and April meetings, with no rate hikes in the summer.
However, the March decision is not expected to be unanimous, especially after Fed governors Stephen Miran and Christopher Waller opposed the committee’s decision to leave the rate unchanged in January.
“Governors Miran and Waller may not be convinced that the labor market is recovering and may want to ‘watch’ for an oil shock – a view we are very sympathetic to,” Wells Fargo economists said in a note. “But, with inflation entering its sixth year and hovering above 2%, there are signs the Committee’s hawks are digging in for an inflationary shock.”
Oxford Economics sees the Fed cutting rates in June and September, driven by a measure of core inflation.
The March rate decision will be released along with the FOMC’s Summary of Economic Forecasts. That quarterly report will include committee members’ projections of the appropriateness of interest rates, as well as their projections of GDP growth, the unemployment rate, and inflation.
Is Powell’s time with the FOMC coming to an end?
The press conference following the decision on the level may be Jerome Powell’s second at last, as his term as chairman will end in May. It is not clear whether Powell will remain on the Fed’s board of governors, where his term does not expire until January 2028. It is a question he has declined to answer in previous meetings.
The March meeting will also mark the first since Trump nominated former Fed Governor Kevin Warsh to be the central bank’s next chairman. Warsh’s confirmation is pending in the Senate, Sen. Thom Tillis, R-North Carolina, vowed to block any Fed proposal until the Justice Department’s ongoing investigation into Powell is resolved. A federal judge on March 13 blocked subpoenas issued to the Federal Reserve related to that investigation, although the DOJ plans to appeal the decision.
“The government has produced overwhelming evidence to impeach Chairman Powell of a crime; in fact, its grounds are so flimsy and unsubstantiated that the Court can conclude they are preposterous,” said Chief US District Judge James Boasberg in his decision.
Tillis on March 13 doubled down on his position to block any appointment of a new chairman.
“This decision confirms how weak and frivolous the criminal investigation of Chairman Powell is and is nothing more than a failed attack on the Fed,” Tillis said in the X post. “We all know how this is going to end and the DCUS Attorney’s Office should save itself further embarrassment and move on. Passing the decision will delay the confirmation of Kevin Warsh as the next Fed Chair.”
Another legal case involving Fed Governor Lisa Cook still surrounds the central bank. After Trump tried to impeach him on corruption charges in 2021, Cook denied wrongdoing and the case went to the state’s highest court. The Supreme Court heard oral arguments in January, but has yet to rule.
Reach Rachel Barber at [email protected] and follow her on X @rachelbarber_
This article first appeared in USA TODAY: Fed to weigh interest rates amid Iran war, rates likely to rise
Reporting by Rachel Barber, USA TODAY / USA TODAY
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