The outbreak of the war in Iran triggered a sharp rise in international oil prices, coupled with the unexpected increase in US PPI data in February, intensifying the rebound in US inflation and putting pressure on economic growth. On the eve of the Federal Reserve's March interest rate decision, the market's expectations for an interest rate cut have significantly cooled down. In the end, the Federal Reserve stayed on hold as scheduled. Although it raised its inflation forecast, it still adhered to its established path of cutting interest rates once in 2026. It fell into a policy dilemma under the multiple pressures of geopolitical conflicts, recurring inflation, and weak employment.

The surge in oil prices and PPI exceeding expectations have highlighted the risk of a rebound in U.S. inflation

Since the U.S. and Israel launched an attack on Iran at the end of last month, Iran has basically blocked the Strait of Hormuz, which transports one-fifth of the world's oil. U.S. oil prices have soared nearly 50% in the short term to about $95 per barrel, and gasoline and diesel prices have risen to the highest level during Trump's two terms. This data does not take into account the direct impact of the Iran war, which means that underlying inflation in the United States has heated up ahead of schedule. If high oil prices persist, U.S. inflation will remain firmly above the Fed's 2% target, and the cycle of excessive inflation may extend to the sixth year. Coupled with the stubborn performance of CPI of 2.4% year-on-year in February and core PCE of 3.1% year-on-year in January, the pressure for rebound in U.S. inflation has become a core challenge for the Federal Reserve.

Before the impact of oil prices was fully reflected, the U.S. PPI data in February had fully exceeded expectations, releasing a signal of accelerating inflation: the overall PPI increased by 0.7% month-on-month and 3.4% year-on-year, the largest year-on-year increase since February 2025; the core PPI increased by 0.5% month-on-month and 3.9% year-on-year, accelerating upward for three consecutive months. This round of PPI increases are driven by both the cost of goods and services. The 0.5% month-on-month increase in service costs contributed to more than half of the increase. Food prices have experienced the largest increase since mid-2021, with prices of fresh and dry vegetables soaring by nearly 49%.

Economists warn: High oil prices will suppress growth and interest rate cuts will be significantly delayed

A survey of 47 academic economists conducted by the Financial Times and the Clark Center for Global Markets at the University of Chicago showed that high oil prices will significantly impact the U.S. economy, exacerbate inflation and block the path to interest rate cuts.

Economic growth is under pressure: 68% of economists predict that if oil prices remain at US$100 per barrel for the rest of 2026, U.S. GDP growth will decline by at least 0.25-0.5 percentage points; in the fourth quarter of 2025, the annualized growth rate of the U.S. economy has dropped to 0.7%, far lower than the previous value of 4.4%. Energy market expert Hamilton warned that if the blockade of the Strait of Hormuz lasts for one month, U.S. full-year growth expectations will be significantly reduced. This view is in sharp contrast to the White House's statement that "the impact of the conflict on the economy will be limited."

Inflation continues to rise: More than 80% of respondents believe that maintaining oil prices at US$100 for a long time will push the overall PCE inflation rate to increase by at least 0.25-0.5 percentage points by the end of the year; 60% of economists expect that core inflation will not fall back to the 2% target until the first half of 2028, a significant increase from the survey last December.

Reversal of interest rate cut expectations: The market originally had expectations for the Federal Reserve to cut interest rates, but now rising oil prices have postponed the next interest rate cut to the spring of 2027; about one-third of respondents expect the Federal Reserve will not cut interest rates throughout 2026, doubling from 15% in December last year.

Fed remains on hold, sticking to expectations of one rate cut per year

At the March interest rate resolution, the Federal Reserve kept its benchmark interest rate range unchanged at **3.50%-3.75%** for the second consecutive time. The policy statement only briefly mentioned that "the impact of the situation in the Middle East is still unclear." The overall statement was basically consistent with the statement at the January meeting. This resolution showed that there are differences within the Fed. Governor Milan once again voted against and advocated an immediate interest rate cut; all officials did not believe that it was necessary before the end of 2026. After the announcement of the resolution, the decline of U.S. stocks narrowed, and the gains of the U.S. dollar and U.S. bond yields fell back. The market awaited Powell's press conference to further clarify doubts.

In the latest economic forecast, the Federal Reserve raised its inflation forecast for 2026 to 2.7% (previous value: 2.4%), mainly reflecting the impact of soaring oil prices; it slightly raised its economic growth forecast to 2.4% (previous value: 2.3%), and the unemployment rate forecast remained unchanged at 4.4%. Despite the intensifying inflationary pressure, the Federal Reserve still adheres to the path of cutting interest rates once in 2026 and 2027. This year it only cut interest rates by 25 basis points and did not announce a specific time, which is contrary to the Trump administration's demand for a significant interest rate cut.

Policy dilemmas intensify: inflation, employment and geopolitical risks are intertwined

The Federal Reserve currently faces three constraints: First, oil prices resonate with wholesale inflation, and the risk of inflation rebounding forces the central bank to maintain a hawkish stance; second, the United States lost 92,000 jobs in February, corporate layoffs emerged, and high borrowing costs suppressed the economy; third, the prospects for geopolitical conflicts in the Middle East are unclear, and energy supply shocks are highly uncertain. This time, the Fed chose to "ignore short-term oil shocks" and stick to the path of gradual interest rate cuts, trying to strike a balance between fighting inflation and stabilizing growth. However, as oil prices exceed US$108 per barrel, if geopolitical conflicts continue to escalate, the Federal Reserve's policy predictions may face revisions, and the volatility and uncertainty in global financial markets will further increase.