The Fed’s rate cut plans are now tethered to oil prices and war, not just inflation

The Federal Reserve’s plan to cut interest rates this year now depends less on a predictable inflation trajectory and more on the volatility of oil prices and the duration of Middle East conflict. At its March 17-18 meeting, the Fed held its benchmark rate steady in the 3.50% to 3.75% range, but internal divisions revealed a growing concern: inflation could remain above the 2% target not just from domestic demand, but from energy shocks tied to war. Many policymakers noted that the surge in oil prices—driven by the US-Israeli conflict with Iran—posed a real risk of feeding into core inflation, especially if higher input costs became permanent. Some argued the Fed should adopt a two-sided policy stance, leaving open the possibility of rate hikes if inflation proved sticky, a shift from January when only “several” officials supported such a move. Yet even as inflation risks grew, most participants still expected rate cuts, not hikes, because an extended conflict could weaken growth, reduce household purchasing power, and soften labor markets. The Fed’s own staff revised their outlook to reflect higher inflation and weaker job growth, citing Middle East developments, government policy changes, and AI adoption. Then, one day before the minutes were released, a ceasefire between the US and Iran cut oil prices by more than 15% to around $92 a barrel—precisely the kind of reversal that makes the Fed’s next move unpredictable. The path forward is no longer a straight line from inflation to rate cuts. It’s a博弈 between energy markets and economic fragility.