Forecasters widely expect the Federal Reserve to keep its benchmark interest rate unchanged when it concludes its two-day meeting on March 18, as policymakers weigh the economic impact of the ongoing war with Iran.
In addition to the United States going to war, much has happened since the Federal Open Market Committee held the rate steady at a target range of 3.5% to 3.75% at its last meeting in January, following three cuts late last year.
January and February jobs reports from the Bureau of Labor Statistics sent mixed signals about the labor market, with January showing growth above expectations and February seeing jobs lost. CPI inflation has ticked down since policymakers last met, but economists want to see March data, as the latest figures do not reflect the recent surge in the cost of oil. Rising oil prices could ripple through supply chains and push other prices higher.
Meanwhile, the Bureau of Economic Analysis revised its estimate of GDP growth in the fourth quarter of 2025 to 0.7%, down from its initial 1.4% estimate, and down from 4.4% in the previous quarter.
Now, stagflation fears are back on the table. Wells Fargo economists, in a note March 12, called high inflation and a weaker labor market the committee’s “worst nightmare” as it juggles its dual mandate to keep prices stable and unemployment low.
Where do the job market and inflation stand?
The BLS reported the U.S. economy added a now-downwardly revised 126,000 jobs in January only to lose an estimated 92,000 in February. The unemployment rate dropped from 4.4% in December to 4.3% in January but returned to 4.4% in February.
CPI inflation eased from 2.7% in December to 2.4% in January and February. That may be a sign that prices are stabilizing under normal circumstances, however it doesn’t reflect potential inflationary effects of the Iran war. Core PCE, one of the Fed’s preferred measures of inflation, rose 3.1% year-over-year in January, its highest level in over a year.
Despite all the developments since the FOMC’s last meeting, Boston College economics professor Brian Bethune said the Fed’s dilemma has not changed.
“The tariff is a supply shock. The oil prices are a supply shock. Well, guess what? The worst nightmare of a central banker is a supply shock, because you get upward pressure on inflation and downward pressure on employment,” Bethune said. “There’s no easy path for rates.”
Liz Thomas, head of investment strategy at SoFi, added that if Fed policymakers face sticky or rising inflation and a weak labor market, “they don’t have a tool that solves for both of those things, so they may have to choose which one they want to target.”
What is the economic impact of the Iran war?
The United States’ decision to go to war continues to rattle Wall Street. Iran’s control over the Strait of Hormuz – which typically transports about 20% of the global oil supply – has halted most traffic, sending oil prices soaring and keeping them volatile.
Much of the economic impact of the war depends on how long it lasts. U.S. consumers are already paying more at the gas pump, and some companies have added fuel surcharges to their prices.
“The futures market is pricing this as a near-term disruption,” said Matt Diczok, head of Fixed Income Strategy for the Chief Investment Office at Bank of America and Merrill. “That might give the Fed a little bit of comfort in looking through that.”
Bethune said while tapping strategic oil reserves may help mitigate the demand pinch, easing sanctions on Russian oil will have little impact on world oil prices.
“Who is Russia aligned with? Iran,” Bethune said. “If Russia provides more support for Iran as a result of having more oil revenue, that will make the war last longer.”
Will high oil prices drive up inflation?
Diczok said in order for high oil prices to translate into sustained higher inflation, consumers have to continue buying at the same rate as they did before, but that typically happens when people feel positively about their job prospects, consumer confidence is high and consumers have decent savings.
None of those are true right now, he said.
“Tariffs, in our opinion, have not led to a massive or sustained increase in inflation because they’re a one-time price increase that people adjust to account for. They buy less of certain things,” Diczok said. “It’s possible a short-term increase in energy prices will do the same thing.”
Bethune said it makes sense that while tariffs did lead to some price increases passed to consumers, they didn’t spark the high inflation levels forecasters initially projected because implementation was more gradual and nuanced than expected. He added companies shouldered much of the remaining costs by tweaking supply chains and hiring less, which shrank payrolls without significantly altering consumer behavior.
Now, if oil prices remain elevated, those same firms will face fresh cost pressures and few, or no, options for substituting oil. The question, Bethune said, is whether they can again extract productivity gains from a flat workforce, particularly amid low income growth.
When will the Fed adjust rates?
Forecasters predict the FOMC will hold its benchmark rate steady at its March and April meetings, with odds of a rate cut rising in the summer.
However, the March decision is not expected to be unanimous, particularly after Fed Governors Stephen Miran and Christopher Waller dissented from the committee’s decision to leave the rate unchanged in January.
“Governors Miran and Waller are likely unconvinced that the labor market is stabilizing and probably want to ‘look through’ the supply-side oil shock — a view for which we have plenty of sympathy,” Wells Fargo economists said in the note. “But, with inflation entering its sixth year and counting above 2%, there are signs some of the Committee’s hawks are digging in amid yet another inflationary shock.”
Oxford Economics sees the Fed cutting rates in June and September, driven by moderating core inflation.
The March rate decision will be released alongside the FOMC’s Summary of Economic Projections. That quarterly report will include committee members’ projections for the appropriate path for interest rates, as well as their projections for GDP growth, the unemployment rate, and inflation.
Is Powell’s time with the FOMC coming to a close?
The press conference following the rate decision may be Jerome Powell’s second to last, as his term as chair is set to end in May. It is unclear whether Powell will remain on the Fed’s Board of Governors, where his term does not expire until January 2028. It’s a question he’s declined to answer at previous meetings.
The March meeting will also mark the first since Trump nominated former Fed Governor Kevin Warsh to become the next chair of the central bank. Warsh’s confirmation is stalled in the Senate, with Sen. Thom Tillis, R-North Carolina, vowing to block any Fed nominations until the Department of Justice’s ongoing investigation into Powell is resolved. A federal judge on March 13 blocked subpoenas issued to the Federal Reserve related to that investigation, though the DOJ plans to appeal the ruling.
“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,” Chief U.S. District Judge James Boasberg said in his ruling.
Tillis on March 13 doubled down on his stance to block any new chair nomination.
“This ruling confirms just how weak and frivolous the criminal investigation of Chairman Powell is and it is nothing more than a failed attack on Fed independence,” Tillis said in an X post. “We all know how this is going to end and the D.C. U.S. Attorney’s Office should save itself further embarrassment and move on. Appealing the ruling will only delay the confirmation of Kevin Warsh as the next Fed Chair.”
Another legal case involving Fed Governor Lisa Cook still looms over the central bank. After Trump attempted to fire her over allegations that she committed mortgage fraud in 2021, Cook denied wrongdoing and the case went to the nation’s highest court. The Supreme Court heard oral arguments in January, but has yet to issue a ruling.
Reach Rachel Barber at [email protected] and follow her on X @rachelbarber_
This article originally appeared on USA TODAY: Fed to weigh interest rates amid Iran war, potential price increases
Reporting by Rachel Barber, USA TODAY / USA TODAY
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