What’s next for Fed as oil rises?

The Federal Reserve began its second meeting of the year on March 17, after keeping interest rates unchanged in January. Markets are closely watching for a decision that comes amid a sharp rise in global oil prices, which has been reflected in US fuel prices, and as Jerome Powell nears the end of his term.

A Pause to Catch Breath

After cutting interest rates by a total of 75 basis points over the last three meetings of 2025, policymakers signaled a “pause to catch breath,” despite US President Donald Trump expressing dissatisfaction with the pace of cuts. Indeed, borrowing costs were held steady at the first meeting of the year, and this pause now appears likely to last longer.

How Much Will Rates Be Cut in 2026?

Initially, markets were hoping for at least two rate cuts this year (25 basis points each). These expectations were more optimistic than the Fed’s own projections released after the December meeting, which pointed to only one cut (25 basis points) throughout the year.

What Has Changed?

While market expectations initially seemed reasonable, the rapid and deepening developments of the war in the Middle East—now in its third week—have begun to weigh on these expectations, increasing the likelihood of rates remaining unchanged for a longer period.

What Does This Mean?

With oil prices rising to their highest levels since 2022—exceeding $100 per barrel—markets now expect just one rate cut this year, likely not before September, compared to earlier expectations of a June cut.

Is There Consensus?

At the January meeting, two FOMC members opposed the decision to hold rates and called for a 25-basis point cut. However, the meeting minutes later revealed that some members warned of inflationary pressures, even raising the possibility of a rate hike despite weakness in the labor market.

What Do the Data Say?

The Fed reaffirmed its data-dependent approach. Recent data showed the Fed's preferred measure of core inflation rising to 3.1% in January, up from 3.0% in December. While this was in line with expectations, it remains above the 2% target.

A Complex Picture

Recent labor market data added further complexity, showing the US economy lost 92,000 jobs in February, after adding 126,000 in January, compared to expectations of a 50,000 increase. The unemployment rate also rose to 4.4% from 4.3%.

How Does Trump See It?

Despite the approaching departure of Fed Chair Jerome Powell in May, Trump continues to sharply criticize him, calling for an immediate rate cut amid the sharp rise in US fuel prices due to the Middle East conflict.

A Heated Backdrop

The Fed meeting comes after Trump officially nominated former Federal Reserve board member Kevin Warsh to succeed Powell as central bank chief, amid rising expectations of a US economic slowdown and potential stagflation following a sharp deceleration in growth during Q4.

What Is Your Decision?

If you were a FOMC member, what would your decision be on interest rates given global developments and domestic pressures?

Sources: Argaam