Ceasefire Calm Could Lock Rates Higher by Leaving Inflation Unchecked

A ceasefire between the U.S. and Iran is reducing the risk of a global economic shock — but it may also be making it harder for the Federal Reserve to cut interest rates. The agreement removes the threat of severe supply disruptions and demand destruction, easing financial conditions and lifting markets. Yet energy prices have not fully retreated, and inflation pressures remain embedded in the economy. That means the Federal Reserve’s path to rate cuts just got steeper.

The Fed’s March 17–18 meeting minutes revealed that most officials now expect inflation to ease more slowly than anticipated. Two policymakers delayed their estimates for when cuts could begin, citing stalled progress toward the 2% target. The vast majority of officials are concerned that tariff effects on goods, energy costs feeding into core inflation, and years of above-target price gains have made inflation expectations harder to control.

Nick Timiraos, widely regarded as a conduit for Fed thinking, noted that the conflict had presented the central bank with a dilemma: war heightened inflation risks, but also raised the chance of a recession — the one scenario that could justify immediate rate cuts. With hostilities paused, the recession risk has faded. But the inflation problem hasn’t.

As Marc Sumerlin, managing partner at Evenflow Macro, put it: 'As the probability of a recession decreases, the likelihood of inflation increases because we face price pressures without significant demand destruction.'

The post-meeting statement kept the Fed’s bias toward rate cuts, signaling that the next move is more likely to be down than up. But the minutes show a growing number of officials are ready to drop that bias if inflation stays elevated. Some now believe the Fed could even consider hiking if prices remain stubbornly high.

St. Louis Fed President Musalem warned that even a swift end to the conflict won’t quickly reverse the damage. Restoring production capacity and supply chains will take time. And geopolitical uncertainty — particularly around the Strait of Hormuz — may keep a structural premium in oil prices for years.

Former Chair Bernanke’s framework still guides the Fed: when inflation is already high, supply shocks can’t be ignored. Today, with expectations unanchored, the Fed can’t afford to look through rising energy costs. The ceasefire may have calmed markets, but it leaves inflation unchecked — and rates likely to stay at 3.5%-3.75% longer than expected.