The Federal Reserve tonight is not only influencing assets but also pricing in a potential US-Iran war.

Reuters Finance News — The Federal Reserve’s March monetary policy meeting, which began on March 17, faces an unprecedentedly complex situation: energy prices soaring due to the Iran war and economic uncertainties, combined with political pressure from the Trump administration, making it difficult for the central bank to balance its dual mandates.

Market expectations generally anticipate the Fed will maintain its January policy stance of keeping interest rates unchanged. However, the release of the “Economic Projections Summary” and dot plot early Thursday will be key to interpreting its future policy path and will set the tone for the potential new chair Kevin Wirth’s approach.

Contradictory Macroeconomic Data: Dual Pressures of High Inflation and Weak Employment

Currently, U.S. economic data show significant divergence, challenging the Fed’s policy judgment.

On inflation, the core Personal Consumption Expenditures (PCE) price index rose 3.1% year-over-year in January, accelerating from 2.8% in November, highlighting persistent inflation well beyond expectations. Notably, this was before the surge in oil prices caused by the war.

The Iran conflict has further amplified price pressures—since the U.S.-led coalition launched bombing over two weeks ago, prices for crude oil, gasoline, natural gas, and fertilizers have surged sharply. The average U.S. gasoline price has increased over 25% compared to pre-war levels, impacting transportation, chemicals, and other sectors, pushing up core inflation and living costs.

Goldman Sachs estimates that this oil price spike could raise global inflation by 0.5 to 0.6 percentage points over the next year, with significant spillover effects on U.S. inflation.

Meanwhile, the labor market shows signs of weakness, contrasting sharply with inflation’s strength.

In February, non-farm payrolls unexpectedly declined by 92,000 jobs. From December to January, net employment growth was essentially zero, and the January surge was confirmed as an anomaly. The economy has returned to a state of job loss.

The unemployment rate in February was 4.4%. While below the 4.5% threshold signaling recession risk per the “Samuelson rule,” the market’s “low hiring, low firing” characteristics remain uncertain. Evidence of labor market stabilization is mixed, diverging from Powell’s January meeting expectation of “steady employment.”

War Impact and Policy Dilemmas: Stagflation Risks and Traditional Frameworks Clash

The energy shocks from the Iran war have placed the Fed in one of its most challenging policy dilemmas in nearly a decade.

Historically, the Fed tends to “penetrate” short-term supply shocks without making significant rate adjustments. However, the unique nature of this conflict—its duration and scope—introduces high uncertainty. The Strait of Hormuz, a critical conduit for one-fifth of global oil supply, faces risks of disruption, raising fears of long-term energy shortages.

This uncertainty disrupts traditional policy logic: rising energy prices typically dampen economic growth and ease inflation. But amid high inflation following COVID-19 and Russia-Ukraine conflicts, markets are increasingly worried about “cost-push inflation spreading,” complicating the Fed’s decision-making.

Analysis firms note that gasoline prices strongly influence consumer inflation expectations. If oil prices remain high and cause gasoline prices to surge further, the FOMC may become cautious in signaling easing.

KPMG’s chief economist states that now is an appropriate time for the Fed to shift its forecast toward “stagflation,” expecting upward revisions to inflation and unemployment projections by year-end, reflecting a “slowdown + rising prices” complex.

However, Goldman Sachs points out that the impact is mainly energy-specific; non-energy trade with Gulf countries accounts for only 1% of global trade, so it is unlikely to trigger widespread supply chain crises like during COVID-19, limiting the scope of the shock.

Political Maneuvering and Chair Nominee Uncertainty: Potential Policy Continuity Changes

The Fed’s policy decisions are also influenced by complex political factors. After facing judicial setbacks last week, the Trump administration plans to appeal a court ruling dismissing subpoenas and continues to criticize Chair Powell, calling his performance “disastrous.”

Meanwhile, Powell’s term ends in May, and the nomination process for his successor, former Fed Board member Kevin Wirth, has become entangled in political battles. Although Wirth remains a high-probability candidate, ongoing investigations by the Justice Department have delayed Senate confirmation. North Carolina Republican Senator Thom Tillis has explicitly stated he will block all Fed nominees until investigations conclude.

Notably, the FOMC has decided that Powell will serve as acting chair until the successor is confirmed, a compromise that ensures policy continuity and eases tensions between the Trump administration and the Fed, possibly leaving room for future policy or personnel negotiations.

Market consensus suggests that regardless of whether Powell or Wirth leads, the current economic environment will delay rate cuts. The CME FedWatch tool indicates markets expect only one rate cut by year-end, likely after September, significantly fewer than the Fed’s internal forecast of up to three cuts this year.

Key Meeting Focus: Dot Plot and Economic Forecast Signals

As the first “Economic Projections Summary” of the year, the dot plot will be a focal point.

In December, Fed officials’ median projection was for one rate cut by 2026, with four officials advocating for two cuts, and three supporting larger cuts this year.

The key question now is whether, amid high inflation, weak employment, and war impacts, officials will adjust their rate path expectations.

Sam Thoms, chief U.S. economist at Pantheon Macroeconomics, predicts the new dot plot will likely show most members maintaining a dovish stance for 2023 and 2027, but the core risk is that the median projection could shift to “holding rates steady until the end of the year.”

Additionally, revisions to the Fed’s outlook on inflation persistence, economic growth slowdown, and unemployment rate increases will provide crucial policy signals.

If officials view energy shocks as “long-term” and expect prolonged pricing wars, they may adopt a more hawkish tone to prevent inflation expectations from spiraling. Conversely, if they see the shocks as “temporary,” they might retain easing options to support the fragile economy.

Conclusion: The Fed’s Decision Not Just About Asset Pricing but Also War Pricing

Amid the Iran conflict, the core mission of the March Fed meeting has shifted from “balancing inflation and employment” to “anchoring policy amid multiple uncertainties.”

Maintaining interest rates unchanged is highly probable, but the real focus lies in the signals conveyed through policy statements and economic forecasts—how they assess stagflation risks, the nature of energy shocks, and the interest rate trajectory.

For markets, attention should be paid to the divergence in the dot plot, upward revisions in inflation forecasts, and downward revisions in growth outlooks—all of which will directly influence the dollar exchange rate, U.S. Treasury yields, and stock markets.

This meeting is not only a response to current economic challenges but also a foundation for the Fed’s future policy framework.

(Edited by: Wang Zhiqiang HF013)