The Fed sees equal odds of a rate hike or cut as Middle East conflict reshapes inflation and growth risks

The Federal Reserve now sees equal chances of raising or cutting interest rates as the war in Iran reshapes the balance of inflation and growth risks. At its March 17-18 meeting, the Federal Open Market Committee held rates steady — but one member, Stephen Miran, dissented in favor of a 25-basis-point cut, underscoring emerging divisions. The minutes reveal that most participants believe upside and downside risks to the economy are now balanced, a shift from earlier assumptions of a gradual easing path.

The pivot stems from rising oil prices tied to the Middle East conflict, which have increased short-term inflation expectations and consumer energy costs. Two-year U.S. Treasury yields rose, driven by higher inflation compensation, while ten-year yields remained flat. Stock indices fell, volatility surged, and investor confidence weakened. Abroad, energy-importing emerging markets saw wider credit spreads, and global sovereign bond yields climbed.

The Fed staff revised its 2026 inflation forecast slightly higher due to the run-up in crude prices. If elevated oil costs persist, inflation could remain above target longer, potentially requiring rate hikes to anchor expectations. Yet the same conflict threatens growth: extended disruption could soften labor markets and dampen economic activity, creating conditions for rate cuts. The staff now sees downside risks to employment and GDP growth, while inflation risks tilt slightly upward.

With uncertainty significantly elevated, the Fed will wait for more data before acting. The market now prices in no rate cuts until the end of the year, a shift from earlier expectations of earlier easing. The Fed’s path forward hinges not on a preset course, but on how the war reshapes the tradeoff between inflation and growth.