The Fed is no longer counting on rate cuts as inflation’s shadow lengthens

A growing number of Federal Reserve policymakers last month saw a credible case for raising interest rates if inflation stayed hot—marking a shift from the assumption that only rate cuts lay ahead. At the March 17-18 meeting, the central bank held its benchmark rate steady in the 3.5%-3.75% range, but the minutes reveal that more officials than in January were open to tightening policy further. The trigger: inflation still above 2%, now reinforced by a 50% surge in oil prices after the outbreak of war involving the US, Israel, and Iran on February 28.

That spike pulled the Fed in two directions. On one side, higher energy costs threatened to push core inflation up through broader input prices and, more dangerously, re-anchor inflation expectations that have been fragile since 2021. Some officials warned that after years of above-target inflation, even temporary energy shocks could have lasting effects. They pushed for a policy statement that acknowledged both rate cuts and hikes as possible—removing the one-sided dovish tilt. The language stayed dovish, but the internal pivot is real.

Yet most participants still expected rate cuts. Why? Because an extended conflict also risked weakening growth and the labor market. High oil prices reduce household purchasing power, tighten financial conditions, and slow global demand—forces that could justify more easing, not less. The Fed staff updated its outlook to reflect higher inflation and weaker growth, but left unemployment projections largely unchanged. The path forward now depends on whether energy-driven inflation fades—or sticks.

A ceasefire announced just after the meeting sent oil prices down 15% to $92 a barrel, offering temporary relief. But the minutes show the Fed’s confidence in a smooth descent to 2% inflation is gone. The next move may not be down.