What we're covering here
• The Federal Reserve’s rate-setting committee is meeting this week against a backdrop of war, an energy crisis, rising costs, a probe of the Fed chair and ongoing attacks on the central bank’s independence.
• Fed officials were expected to cut rates at least once this year, but economists now say all bets are off after the US and Israel launched a war with Iran.
• The conflict in the Middle East has created an energy price shock that could push up the cost of consumer goods and reignite the higher inflation the Fed has been trying to contain since 2022.
• Still, markets overwhelmingly expect the central bank will on Wednesday afternoon announce a pause, leaving interest rates in the 3.5% to 3.75% range.
What's the Fed's big move if the war throws the economy into a recession or stagflation?
The Federal Reserve will be between a rock and a hard place if the US economy enters a recession as a result of the ongoing war with Iran.
Typically, when the economy experiences a significant downturn, the Fed’s go-to medicine is to lower interest rates. Generally, doing so helps encourage businesses and consumers to spend more money because it lowers borrowing costs, which in turn helps stave off further layoffs.
But the Fed’s decision would likely be complicated by an inflation acceleration stemming from higher energy prices. Economists have a special term to define the ugly combination of rapidly accelerating inflation occurring alongside significantly slower economic growth: stagflation.
If an economy experiences stagflation, then cutting interest rates — while helpful to the employment side of the economy — would likely add to the inflation problem. That’s because, if prices are already rising beyond desired levels, lowering rates increases demand for goods and services, leading businesses to raise prices even higher.
The predicament may therefore lead the Fed to favor doing nothing. That could, however, mean pushing the economy into a deeper recession.
But the Fed isn’t the only government body that has a role to play in the event that the economy experiences a recession. Congress, the president and state governments could opt to pass stimulus packages, as was the case during the pandemic.
The Fed is keen not to repeat its infamous "transitory" inflation mistake
Throughout much of 2021, many Federal Reserve officials hesitated to raise interest rates despite consistently rising inflation. In explaining their decision to leave rates unchanged, several monetary policy statements from that period noted that “inflation has risen, largely reflecting transitory factors.”
At the time, officials believed the run-up in inflation would be short-lived, and as the economy continued to recover from pandemic lockdowns, the pace of price increases would moderate.
But the word “transitory” later came to haunt the Fed as it became clear that inflation was not only sticking but worsening — and the central bank was contributing to the problem by keeping rates at ultra-low levels.
Fed Chair Jerome Powell has repeatedly acknowledged the central bank could have helped prevent the vicious chapter of inflation that ensued had it not waited so long to raise rates.
Now, with the risks of higher inflation climbing due to soaring energy prices stemming from the war with Iran, Fed officials may be much more hesitant to lower rates, even as the labor market has weakened significantly over the past year. On the other hand, some analysts believe the Fed may have to cut, in order to avoid the economic slowdown that comes as a result of higher gas prices.
Mortgage rates jump as Iran war spooks markets
Mortgage rates climbed last week to their highest level in more than a month as the war in the Middle East intensified.
The average rate on a standard 30-year fixed mortgage rose to 6.11% for the week ending March 12, just two weeks after briefly falling below 6% for the first time in more than three years.
Many experts had hoped that a drop below 6% would breathe new life into the market, as homeowners who locked in ultra-low rates during the pandemic might finally be more willing to sell.
But the so-called lock-in effect may already be easing. For the first time in five years, more borrowers have mortgage rates above 6% than below 3%, according to a report this week from Redfin.
Rates also remain lower than they were at the start of last year’s spring homebuying season. In March 2025, the average 30-year fixed mortgage rate was above 6.6%
Trump has called on Fed Chair Jerome Powell to cut interest rates. But the Fed doesn’t directly set mortgage rates. Instead, they tend to track the 10-year Treasury yield, which has risen recently as investors worry that a prolonged war could push oil prices higher and reignite inflation.
Here's what Fed officials have said about the US-Israeli war with Iran
Some Federal Reserve officials have weighed in on what the US-Israeli war with Iran may mean for the US economy and the path of interest rates.
The United States and Israel launched attacks on Iran about a week before the Fed’s so-called blackout period, a two-week timeframe leading up to each Fed meeting when officials are prohibited from discussing monetary policy publicly.
Here’s what Fed officials have said so far about the economics of the Middle East conflict.
- “Now, with the geopolitical events, we need to get a lot more data in,” Minneapolis Fed President Neel Kashkari, a Fed voter this year, said March 3 at an event in New York. “Right now it’s just too soon to know what imprint this has on inflation and for how long.”
- “We’ll have to see how persistent this is,” New York Fed President John Williams, a permanent Fed voter, said March 3 at an event in Washington, DC. “The important question is quantitatively how big of an effect does that have on the US and how persistent those effects are in terms of price stability.”
- “For us thinking about policy going forward, this is unlikely to cause sustained inflation,” Fed Governor Christopher Waller told Bloomberg TV on March 6. “That’s one reason we don’t look at energy prices. When we look at core, core is a better predictor of future inflation.”
- “We already had these big question marks,” Chicago Fed President Austan Goolsbee told The Wall Street Journal in a March 6 interview, explaining how the oil crisis is now making it difficult to discern tariff inflation. “It does dovetail energy prices with what’s going to happen with tariffs,” he said.
Stocks are lower heading into Fed rate decision
US stocks were slightly lower Wednesday afternoon ahead of the Federal Reserve’s decision on interest rates.
The March Fed meeting is set against the backdrop of rising energy prices due to the Iran war. Wall Street will been keen to hear how the central bank is reacting to the surge in oil and gas prices.
“How [Fed Chair Jerome] Powell characterizes how the institution thinks about energy shocks is going to be probably the most useful takeaway for investors,” said Ross Mayfield, investment strategist at Baird Private Wealth Management.
Traders will also pore over the Fed’s quarterly Summary of Economic Projections, which includes the so-called dot plot, laying out anonymous forecasts for rates.
Here’s a look at markets heading into the rate decision:
- S&P 500 down 0.55% as of 12:30 p.m. ET
- Brent crude up 4.55% to $108.13 per barrel
- 10-year US Treasury yield up two basis points to 4.22%
- US dollar index up 0.2%
- Gold futures down 2.6%
This central bank already raised rates due to the war. Others could follow
The Federal Reserve isn’t the only major central bank holding a monetary policy meeting this week. The Reserve Bank of Australia, Bank of Canada, Bank of Japan, Bank of England and European Central Bank all either had or are scheduled to meet.
Like the Fed, most of these central banks are expected to leave rates unchanged. But there’s been one notable exception so far: Australia.
The country’s central bank opted to raised interest rates by a quarter point on Tuesday, citing inflation concerns stemming from the war with Iran.
“The conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation,” the bank’s monetary policy said. “Short-term measures of inflation expectations have already risen. As a result, the Board judged that there is a material risk that inflation will remain above target for longer than previously anticipated.”
While the ECB is among the central banks expected to hold rates steady, traders are now predicting it will hike rates twice this year to similarly counteract inflation.
Justice Department is adamant about investigating Jerome Powell
The Trump administration isn’t abandoning its probe of Federal Reserve Chair Jerome Powell, even after a judge quashed a pair subpoenas last week.
In court documents unsealed March 13, US District Judge James “Jeb” Boasberg wrote that a “mountain of evidence suggests that the Government served these subpoenas on the Board to pressure its Chair into voting for lower interest rates or resigning.”
“On the other side of the scale, the Government has produced essentially zero evidence to suspect Chair Powell of a crime; indeed, its justifications are so thin and unsubstantiated that the Court can only conclude that they are pretextual,” Boasberg said.
That same day, DC US Attorney Jeanine Pirro in a hastily organized news conference slammed the judge’s characterization and said she will appeal the decision.
“This is the antithesis of American justice,” Pirro said, later adding, “This judge has put himself at the entrance door to the grand jury, slamming that door shut.”
Pirro said that Boasberg determined that Powell is “beyond reproach.”
Here’s what Wall Street expects from the Fed today
The Federal Reserve at 2 p.m. ET will announce its decision on interest rates.
Wall Street expects the Fed to hold rates steady, standing pat after holding rates steady in January. It comes after three consecutive rate cuts in September, October and December.
Here’s what economists and investors are saying ahead of the announcement and also remarks from Fed Chair Jerome Powell at 2:30 p.m. ET:
- “Markets want to know the Fed’s reaction to oil prices and the war.” — Paul Donovan, chief economist at UBS Global Wealth Management. “US retail gasoline prices are almost exactly a dollar … above 2026 lows, having risen every day for four weeks.”
- “I will be listening closely to how Chair Powell frames energy prices, and whether he treats them as a temporary shock or something that risks bleeding into inflation expectations.” — Christian Hoffmann, head of fixed income at Thornburg Investment Management.
- “We think Fed officials will avoid making bigger updates to their policy plans, reflecting uncertainty around the duration of the energy shock and weaker Feb labor data that underlines ongoing need to balance inflation vs. labor risks.” — Krishna Guha, vice chairman at Evercore ISI.
- “The more interesting news will be what is communicated in the interest rate forecast ‘dots’ for this year.” — Michael Feroli, chief US economist at JPMorgan Chase. “It’s a very close call between looking for no cuts or remaining at one cut, but we lean a little in favor of the median dot continuing to look for one cut.”
Hot wholesale inflation data dings odds for future rate cuts
February’s hotter-than-expected Producer Price Index Wednesday not only further reinforced an anticipated pause later in the day from the Federal Reserve but also shaved the odds for future rate cuts.
The latest CME FedWatch Tool shows a 98.9% probability that Fed policymakers will keep rates on hold. Odds for a rate hike Wednesday afternoon bumped up to 1.1% from 0% last week.
The odds for rate cuts in the June and July meetings slipped to 16.3% (from 20%) and 26.2% (from 31.5%), respectively.
“This isn’t the kind of PPI report the Fed wants to see,” Oren Klachkin, financial markets economist at Nationwide, wrote Wednesday in a note to investors. “This report suggests inflation was going to accelerate even before the Iranian conflict hit.”
As such, the PPI report tilts the risks for the Fed to take a more hawkish approach in the coming months, noted Eugenio Alemán, Raymond James’ chief economist.
“Even if rates are left unchanged and we see multiple dissents, the messaging may lean toward ‘higher for longer,’ especially with energy inflation set to re‑enter the picture in coming months,” he wrote in commentary Wednesday.
Powell only has one more meeting as Fed chair — technically
After eight years serving as chair of the Federal Reserve, Jerome Powell has, after this week’s meeting, just one more monetary policy meeting left in the position. But there’s a chance his time as chair will extend beyond May 15, when it officially expires.
That’s because the Senate Banking Committee has yet to announce a date for a hearing to consider President Donald Trump’s nominee to replace Powell, former Fed Governor Kevin Warsh. If Warsh isn’t confirmed by May 15, it’s likely Powell will become acting chair.
Warsh’s nomination has been held up in part because Republican Sen. Thom Tillis, who holds a key vote on the committee, vowed to hold up the process unless DC US Attorney Jeanine Pirro stops pursuing a criminal inquiry into Powell and the central bank. Pirro’s inquiry revolves around the Fed’s multibillion-dollar renovation of its Washington, DC, headquarters.
Last week, a federal judge tossed the case, saying in an unsealed opinion that the government “produced essentially zero evidence to suspect Chair Powell of a crime.” Pirro vowed to appeal the decision.
Outside of the ongoing case, the White House has not submitted necessary paperwork to the Senate committee, Semafor reported. A likely culprit of the holdup is financial disclosure documents that Warsh is required to complete, the outlet said, citing sources familiar with the process.
What is the "dot plot" and why is this one especially important?
While the Federal Reserve is widely expected to hold rates steady on Wednesday, it is less clear what will happen at upcoming meetings this year.
That’s because the war with Iran has increased the risk of higher inflation stemming from a surge in energy prices. Ordinarily, that might lead the Fed to consider raising interest rates, but since the labor market has been steadily weakening, central bankers may be mulling a rate cut. However, that could add to inflationary concerns.
At 2 p.m. ET today, the Fed’s game plan might become slightly more clear. In addition to announcing its interest rate decision, that’s when the Fed will release what’s colloquially known as the “dot plot.”
The dot plot is part of the Fed’s Summary of Economic Projections, a quarterly forecast on the economic outlook from all 12 regional Fed bank presidents and the seven members of the Fed’s Board of Governors.
Their forecasts are anonymous and are displayed simply as a dot on a plot — hence the moniker. But what gets the most attention is median value of various projections officials make.
Among those is where they believe interest rates should be to achieve an optimal balance between risks to inflation and employment. But their predictions should be taken with a giant grain of salt because as officials learn more about how economic conditions evolve, their views about the best course of action likely will, too.
Stocks fall and oil prices rise as Iran war keeps traders on edge
US stocks opened lower Wednesday and global oil prices surpassed $108 per barrel as the Iran war continued to roil markets.
The Dow was down 173 points, or 0.37%. The S&P 500 fell 0.3%, and the Nasdaq sank 0.32%.
Stock futures turned lower and oil prices climbed after Iran said the United States and Israel attacked oil and natural gas facilities in the country. Brent crude, the global oil benchmark, rose 4.7%, to $108.28 per barrel. US crude oil rose 2.15%, to $97.58 per barrel.
Stocks and bonds were also under pressure as traders reacted to hotter-than-expected inflation data.
Treasury yields ticked higher as investors sold bonds. The US dollar strengthened against other major currencies.
Traders are also on alert for insight about the Federal Reserve’s outlook for interest rates. Wall Street this afternoon will get the Fed’s Summary of Economic Projections as well as comments from Fed Chair Jerome Powell.
“We expect no changes to interest rates on Wednesday, and while the Fed typically looks through oil shocks, we’ll be lucky to get even one rate cut this year,” Rick Gardner, chief investment officer at RGA Investments, said in a note.
US gas prices hit highest level in more than two years
Gasoline prices in the United States hit their highest level in almost two and a half years on Wednesday, delivering another setback to Americans struggling to get by.
The price of a gallon of regular gas rose another 5 cents, on average, to $3.84, the highest price since September 25, 2023, according to the American Automobile Association.
Gas is now averaging $4 or more in seven states, and it has topped $5 a gallon in California, Hawaii and Washington, AAA said.
Wholesale inflation surged in February, even before the Iran war
US wholesale inflation rose much faster than anticipated in February, hitting its highest rate in a year as prices rose broadly for businesses – particularly for energy and food.
The Producer Price Index increased 0.7% from January, driving the annual rate to 3.4% – the highest since February 2025, according to Bureau of Labor Statistics data released Wednesday.
Economists expected wholesale prices to rise 0.3% from January, holding the annual rate unchanged at 2.9%, according to FactSet consensus estimates.
Food prices jumped 2.4%, the highest monthly increase in nearly five years. Energy prices climbed 2.3%, rising in anticipation of a Middle East conflict.
When excluding food and energy, wholesale prices rose 0.5%, lifting the annual rate to 3.9%, the highest since January 2025.
Economists expected core PPI to rise 0.2% from the month before and the annual rate to moderate to 3.5%.
The PPI, which measures the average change in prices that producers receive for their goods and services, serves as a potential bellwether for the prices consumers may see in the months ahead.
The monthly report also offers up some signals for the Federal Reserve’s preferred inflation gauge, as several PPI data points feed into the Personal Consumption Expenditures price index.
Stock futures turn lower ahead of Fed decision
US stock futures fell Wednesday morning as traders digested inflation data, braced for news from the Iran war and awaited the Federal Reserve’s decision on interest rates, set to be announced at 2 p.m. ET.
Dow, S&P 500 and Nasdaq 100 futures erased earlier gains after a Bloomberg News report, citing Iran state TV, that the South Pars natural gas field was hit by US and Israeli strikes.
Stock futures remained under pressure after new data showed wholesale inflation rose more than expected in February. Dow futures were down 128 points, or 0.27%. S&P 500 and Nasdaq 100 futures each also fell 0.27%.
Traders had already expected the Fed to hold rates steady this month, but the Iran war has clouded the outlook for future rate cuts. Traders are pricing in just one rate cut this year, to take place in December, according to CME FedWatch.
Wall Street’s focus will be on the Fed’s quarterly Summary of Economic Projections, as well as remarks from Fed Chair Jerome Powell.
Despite recent fluctuations in oil prices, stocks are coming off two days in the green. After sliding 1.6% last week, the S&P 500 is up 1.27% so far this week.
Traders continue to monitor headlines about the effective closure of the Strait of Hormuz. Oil prices were mixed Wednesday morning: Brent crude, the global benchmark, rose 2.2%, to $105.73 per barrel. US crude oil egded lower to $95.50 per barrel.
Will the Fed be able to cut rates at all this year?
The US-Israeli war with Iran has sparked the biggest disruption to oil supply in history, sending energy prices higher and threatening to jack up the cost of nearly everything Americans buy. At the same, investors and Fed officials are still waiting to see the full effects of President Donald Trump’s tariffs on inflation.
Already, the central bank forecasts only one quarter-point rate cut this year — and new projections are set to be released Wednesday.
But several economists, including ones at Mizuho Securities, Goldman Sachs, Morgan Stanley and JPMorgan, believe the central bank will continue to project one quarter-point cut this year. In some cases, that differs from what they believe the central bank should do.
“While we think the economics argue for rates unchanged for a while, we also think the leadership may have a little bit of an employment bias,” JPMorgan chief US economist Michael Feroli wrote in a note earlier this week. (An employment bias would mean the Fed favors cutting rates to boost the labor market rather than concentrating more on the inflation side of its mandate.)
Morgan Stanley economists, meanwhile, believe that two cuts are necessary this year, given the latest jobs report, which showed the economy shed 92,000 jobs last month.
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