WASHINGTON— Federal Reserve officials meet this week facing a policy outlook suddenly complicated by the Iran conflict, which has disrupted roughly a fifth of global oil supply and raised the prospect of a difficult mix of slower growth and renewed inflation, according to Reuters.
With inflation still running about a point above the Fed’s 2% target and oil prices surging nearly 50% in two weeks, policymakers are widely expected to hold rates steady but signal a cautious, potentially more hawkish stance.
The central question is whether the conflict proves to be a short-lived energy shock or the type of supply disruption that keeps inflation elevated and tightens financial conditions enough to damage growth. Reuters reported that some economists are now openly asking whether a rate hike in 2026, once seen as unlikely, may need to be considered if inflation expectations begin to climb.
The Fed’s challenge is compounded by signs of strain already visible in the economy, including February’s loss of 92,000 jobs, stretched middle- and lower-income consumers, and the risk of tighter credit if falling asset prices persist. U.S. gasoline prices had climbed nearly 25% in the two weeks following the start of U.S. and Israeli attacks on Iran, reaching their highest level since October 2023, Reuters noted, though Energy Secretary Chris Wright said he expects the conflict to end within weeks and prices to ease.
Even so, the Fed will issue updated economic projections at this week’s meeting, forcing policymakers to make fresh assumptions amid extreme uncertainty. Reuters said officials must now weigh whether the greater risk is that inflation reaccelerates and requires tighter policy, or that the energy shock and market volatility undermine the economy enough to eventually justify rate cuts.
For now, the most likely outcome remains no change in rates, but the tone of the meeting may shift. Reuters said the easiest path for the Fed may be to stay close to its December outlook, which projected just one rate cut this year, while acknowledging that the balance of risks has become far less favorable as inflation concerns rise even as growth risks mount.