Iran scrambles inflation signals as Fed mulls interest rates

• Key Insight: The U.S. involvement in the war with Iran has driven energy prices higher, a development economists say could add to inflation and reduce the likelihood of rate cuts this year.
• Expert quote: "I think the Fed is just going to sit on its hands quite happily because of what's going on in Iran and uncertainty around tariffs." — Mark Spindel, Chief Investment Officer at Potomac River Capital.
• What's at stake: The Federal Reserve's dual mandate — maximum employment and stable prices — is showing signs of imbalance, as labor market data shows signs of weakening just as supply disruptions spurred by U.S. involvement in the war in Iran are stoking fears of upward inflationary pressure.

WASHINGTON — Markets are widely expecting the Federal Reserve's Federal Open Market Committee to keep interest rates steady during its regular meeting March 17-18, but the forward guidance remains tenuous amid growing risks to both sides of the central bank's mandate.

Two of the biggest factors weighing on the Fed's longer-term monetary policy outlook are the war in Iran and continued uncertainty surrounding President Donald Trump's tariff policies.

Both are expected to deter policymakers from cutting short-term rates in March, said Mark Spindel, chief investment officer at Potomac River Capital.

"I think the Fed is just going to sit on its hands quite happily because of what's going on in Iran and uncertainty around tariffs," he said.

The CME Fedwatch tool shows that 99.1% of investors expect rates to stay unchanged. The Fed's current interest rate target is between 3.5% to 3.75%.

The Fed last cut rates at the end of last year to support the labor market. Since then, the data has been mixed. Employers added 130,000 jobs in January, while 92,000 jobs were lost the following month. Under different circumstances, such data might have prompted further rate cuts to support growth and hiring, economists said. But persistent inflation risks have made that outcome unlikely.

Derek Tang, CEO of Monetary Policy Analytics, said the conflict in Iran has already pushed up energy costs, including gasoline, complicating the Fed's policy outlook.

"Higher energy prices are being felt at the gas pump and this could raise inflation expectations with the history of previous inflation shocks," Tang said. "But higher energy prices can also dampen consumption and investment and introduce recessionary risk too, which makes their decisions harder to make."

How long the United States remains involved in the conflict will likely shape the Fed's policy path. For now, the war's impact on growth and inflation is "unknowable," said Christopher Hodge, chief economist at Natixis Corporate & Investment Banking, and will depend on the "severity and duration of the conflict."

"I think there will be very little in the form of forward guidance, and instead Fed Chair Jerome Powell will insist that the current policy is in a good place to adapt to the constantly moving environment," Hodge said.

Inflation has eased but remains above target. The annual rate was 2.4% in January, down from around 2.7% in prior months, but still above the Fed's 2% goal.

Rising energy costs have led some economists to scale back expectations for rate cuts this year. Gregory Daco, chief economist at EY-Parthenon, said he now expects just one quarter-point cut, likely in December.

"We have revised our baseline to show only one 25 basis point rate cut in 2026, likely in December, but it is entirely plausible that the Fed won't deliver any rate cuts this year," wrote Daco.

More broadly, Daco said the Fed is likely to resume easing only if inflation shows sustained improvement or the labor market weakens meaningfully — conditions he does not expect to materialize in the first half of the year.

"Fed officials are likely to resume easing only for clear 'good' reasons — more rapidly and sustainable progress toward the 2% inflation target — or clear 'bad' reasons, [such as] a meaningful deterioration in labor‑market conditions," he said. "We expect insufficient evidence of either in the first half of the year, keeping the Fed on hold at least until July."

The March meeting could show even more dissent on the FOMC than the committee had experienced in prior months. Hodge said he expects Fed Vice Chair for Supervision Michelle Bowman — who was first nominated to the board by President Trump in his first term — to call for a rate cut, joining Fed Gov. Christopher Waller and Fed Gov. Stephen Miran, who have both called for rate cuts in prior meetings. 

Hodge said those calls for lower rates will be countered by policymakers who view current policy as appropriate given resilient growth and the risk that higher energy prices could lift long-term inflation expectations.

"Sitting in the middle are a majority of FOMC participants who believe cuts will be appropriate once it is clear that inflation is not reaccelerating," said Hodge. "We expect the official statement and Powell's press conference to reflect that third view."

The March meeting is expected to be one of the final meetings chaired by Powell before his term expires in May, though uncertainty surrounding his tenure remains.

Daco said there is an increased likelihood Powell could remain in the role beyond May — and potentially through the midterm elections — as legal and political challenges complicate the confirmation of a successor. Under the Federal Reserve Act, a sitting Fed chair may remain at their post until a successor is confirmed. Powell's term as a Fed Governor does not expire until 2028. 

Sen. Thom Tillis, R-N.C., a member of the Senate Banking Committee, has said he will block the confirmation of Kevin Warsh, Trump's nominee for Fed chair, until a probe into Powell is dropped. 

Court documents unsealed March 13 show a federal judge tossed the case against Powell related to renovations at the Fed, citing a lack of evidence. However, the Department of Justice said it would appeal this decision, setting up a waiting game for Warsh's confirmation.

Tillis said in a post on X that he will maintain his hold on the nomination as the appeal proceeds, calling the investigation "weak and frivolous."