March 31, 2026      

     The Middle East conflict and resulting negative supply shock have stoked inflationary pressures and growth concerns, roiling global financial markets with bond market yields rising and equity prices falling. As contained in the policy statement released following the March 17-18 Federal Open Market Committee (FOMC) meeting, “Uncertainty about the economic outlook remains elevated. The implications of developments in the Middle East for the U.S. economy are uncertain.” The Committee elected to hold rates steady for the second consecutive meeting to assess the impact of the war on the balance of risks to inflation and growth. Also making the Fed’s job more difficult are tightening financial conditions, the evolving situation with tariffs and tariff refunds, and distorted and delayed economic indicators resulting from the government shutdown, along with mixed incoming indicators.

     
     Concern around the labor market intensified following the surprising decline of 92,000 non-farm payrolls in February and the unemployment rate ticking up to 4.4% from January’s 4.3%. Several factors, including a healthcare strike and inclement wintry weather, may have contributed to the weaker report. Other labor-related reports such as weekly jobless claims and a January increase in job openings were not alarming and, in fact, hinted at stabilization in the jobs market.

            The surge in the price of oil and fertilizer is troublesome for inflation and consumers. Recent inflation gauges showed headline and core year-over-year rates remaining relatively stable, but still above the Fed’s target. These reports are now quite stale, however, as data was collected prior to the U.S.- Iran war and the oil and accompanying supply line shock. The spiked price of fertilizer can quickly translate into higher food prices with elevated gas/diesel prices further adding to the cost of getting the food to market. Higher gasoline prices, higher food costs and a negative wealth effect from falling equity prices could further dampen consumer spending, putting a drag on economic activity. Uncertainty regarding the duration of these higher prices and supply disruptions may further lead a cautious consumer to pull back, creating the potential for a self-reinforcing stagflation scenario.

     The decision to keep the targeted fed funds range at 3.50% to 3.75% was not a unanimous one. Fed Governor Miran dissented in favor of cutting rates. The dot plot, released following the meeting, revealed that some participants drifted upward in their dots, but the median projection for 2026 was still for one rate cut with an additional rate cut in 2027. On the other hand, minutes from the January meeting released in late February showed some Fed officials had wanted to add language leaving open the possibility of rate hikes if inflation stays elevated, which, in view of recent developments, appears much more likely today than it was then.