US Weighs Fed Rate Cuts vs Inflation as Iran War Impacts Markets

Federal Reserve officials met on March 17-18, 2026, while the U.S.-Iran war continued to unfold. Minutes from the Fed’s meeting has now just been released. From the minutes, some policymakers worried that the war’s oil shock would keep inflation high, but most still believed a prolonged conflict could lead them to cut rates further. 

This means that despite the near-term caution, the Fed has kept its options open for a possible monetary easing(Fed rate cut)  later in the year. 

Takeaways From the Fed Meeting: Double Trouble From the Iran Conflict

In March, the Fed left its policy rate unchanged at 3.50%-3.75%. The minutes indicate that officials struggled with “starkly differing scenarios” arising from the war. The war sent oil soaring from about $70/barrel to $100/barrel in late February, sending nearly all Fed officials to hike their 2026 inflation forecasts.

As a matter of fact, the minutes state that some policy makers pushed to include the language keeping the door open to future rate increases if inflation remained high. 

However, a larger majority still expected drawn-out conflict to slow growth enough to make more easing necessary.

As the minutes note, “many participants” believed that additional cuts were likely; “most participants” thought a prolonged war “could result in further softening in labor market conditions, which could warrant further rate reductions”. 

In short, the Fed’s baseline outlook was still eventual loosening, depending on war effects.

Here are some key quotes from the minutes:

“Some participants judged that there was a strong case for a two-sided description of the Committee’s future interest rate decisions… reflecting the possibility that upwards adjustments… could be appropriate if inflation were to remain above target”.

But “many participants” still viewed rate cuts as part of their baseline outlook, given that rising oil prices might eat into households’ purchasing power and slow growth.

Fed Chair Powell had previewed this balancing act himself: “We did talk about alternative scenarios … It’s very uncertain”, he had said regarding how the war will last and its effects. 

The March press release had preserved language hinting at future cuts, but the minutes revealed that several officials wanted to make it clear that hikes were not entirely off the table.

Ceasefire Eases, But Oil Remains High

In early April, news of a temporary Iran-Israel ceasefire caused markets to relax their fears and pushed oil prices from $100 to the low $90s. This eased the fears of a rebound in inflation which helped rekindle some bets on Fed easing. 

However, oil is still about 30 percent higher than pre-war levels, keeping inflation risk alive.

Mary Daly, the president of the San Francisco Fed, warned that it’s “too early to know” the war’s complete effects. She emphasized that a temporary push in headline inflation alone wouldn’t justify changing policy, but a lasting shock could create a hard choice between combatting inflation and sustaining growth. 

Meanwhile, Dallas Fed research indicates that if oil stays above $110 or shipping through the Strait of Hormuz is disrupted, the Fed’s 2026 inflation forecast (now 2.7% core PCE) could prove too rosy.

How the Market Responded: Futures, and Expert Take

Traders have changed their expectations of a rate cut. As soon as the ceasefire was announced, markets accounted for a very high probability (around 65%) of at least one Fed rate cut in 2026. By April 8, it had fallen to about a one-in-four chance, a decline that just shows renewed uncertainty. “

Table: Fed Rate Cut Odds (2026)

Sources: Reuters (Fed minutes, market data).

Experts Weigh In

Krishna Guha, an economist at Evercore ISI, argued that the market should be pricing “closer to one full cut” in 2026, since war-related price pressures are probably temporary. ClearBridge’s Jeff Schulze also points out that traders aren’t priced for any rate move this year but that a swift resolution in Iran would likely be a good cause for the Fed rate cut. 

Wells Fargo, on the other hand, now says it expects no cuts from the Fed this year because of lingering uncertainties. Citigroup also pushed its cut timeline to later in the year, citing strong jobs data and inflation risks.

In all, markets are embracing the Fed’s caution.

Inflation vs Growth: What Does the Future Hold?

Analysts have spoken out on the Fed rate cut dilemma. JPMorgan economist Michael Feroli said high oil prices are putting upward pressure on inflation projections, explaining why officials squabbled over stating an option to hike. 

However, if oil prices stall or fall, the inflation danger may retreat. Evercore’s Guha commented that Fed policymakers must balance two worlds: “It’s very much a pivot point – either we’re in for more cuts, or the end of a longer war means delays”.

Similarly, Atlanta Fed President Raphael Bostic recently said the path of the Fed would depend on data, especially how long oil prices remain high. Former Fed governor Lawrence Lindsey (now at UBS) notes that U.S. core inflation runs close to target but the headline rate could edge up if war lasts.

Many experts agree with the Fed minutes in the long-term. For example, a new study from the Dallas Fed indicates that if oil remains high, households will face squeeze and to some extent the Fed will have to be more accommodative.

In this sense, the minutes’ recognition of “further rate cuts” if inflation remains persistently high resonates with models that show growth slowing in the face of energy shocks.

In the short-term, strategists say, the Feds seem likely to remain calm. The CME FedWatch Tool currently suggests a mere 25% probability of a hike or cut by year’s end, and traders don’t expect material policy change until late 2027. Fed officials such as Mary Daly have played down any imminent shift, keeping the focus on data.

Conclusion

Fed rate cuts are still very much on the table for policymakers based off of the ongoing Iran war. The March Fed minutes, released on April 8 reveal a Fed that is split. Fears over inflation would suggest delaying cuts or even hikes, but most officials still see that prolonged conflict could justify additional rate cuts. 

In effect, that leaves the Fed ready to hold steady for now without closing the door on loosening later if war continues to linger or peace arrives. Market pricing has swung because the ceasefire briefly sent cut bets surging, before reality set in and pulled them back near 25% odds.

Investors should therefore monitor developments in oil and conflict closely. A quick peace and lower oil prices could nudge the Fed toward cuts, experts say. But, if oil remains high and inflation hangs around, the Fed will most likely keep it at this level until substantial disinflation arrives. 

For now, the Fed has cracked the door open for cuts in coming months, but that result depends on how this conflict plays out.

Glossary

Fed Minutes: They are the written record of the discussions that take place at the Federal Open Market Committee (FOMC) meeting. Published three weeks after each, they provide insight into officials’ thinking and reasoning. The above analysis is based on the March 2026 minutes.

Federal Funds Rate: The main policy tool the Fed has, this stands at 3.50%-3.75% (as at March 2026). It’s the fee banks charge each other overnight and helps set all borrowing costs.

Cuts: Where the Fed decreases the federal funds rate. The cuts are designed to boost the economy by lowering the cost of credit. The Fed has lowered rates multiple times since 2024. Future cuts are “on the table” as far as outlooks go.

Rate hikes: The opposite of cuts, raising the federal funds rate to dampen inflation by making borrowing costlier. 

Inflation: The rate at which consumer prices increase. 

Fed fund futures: Financial contracts that indicate the market’s expectations for future changes in rates by the Fed. 

Frequently Asked Questions About Fed Rate Cuts

Does the March Fed minutes say the Fed would bring rates down?

The minutes did note that most Fed officials still saw the need for more Fed rate cuts if the conflict in the Middle East worsened. Most notably, many participants viewed the Fed rate cuts as being in line with the baseline outlook, adding that extended war could warrant additional rate cuts. But some officials wanted to make it clear that rate increases might also be needed if inflation remains high.

How did the Iran war influence Fed policy expectations?

The war’s oil shock pushed up forecasts for inflation in the United States, and some Fed officials worried that inflation would remain well above 2 percent. That led policymakers to discuss contingency plans for either eventuality. If the conflict gets a little better (and oil prices drop), the Fed may return to cuts. If oil keeps inflation higher, the Fed rate cuts might be delayed or forgone.

What are the markets now pricing for Fed rate cuts?

Futures markets were valuing about a 25% probability of at least one Fed rate cut by end-2026. Right when the ceasefire was over, cut odds were up to 65%, then fell back as analysts rethought the data. Traders currently price almost no chance of a hike and only a moderate likelihood that easing will be delivered this year.

Do 2026 Fed rate cuts still make sense?

It depends on the war and inflation. A lot of analysts say cuts look likely if the conflict drags on and cools growth. Some like Wells Fargo have moved cut expectations out to late 2026, while others (e.g. Evercore) still think the market should be pricing in at least one cut. The Fed itself has left cuts “on the table,” depending on data.

How does oil price affect Fed decisions?

Oil prices feed directly into inflation and households’ costs. Prices of oil have climbed for an extended period, prompting Fed officials to predict higher inflation through 2026. Inflation was raised to 2.7% for 2026 in the March Fed projections partly because of oil. If Oil drops due a permanent cease-fire), inflation pressures would subside and cuts become easier later.

References

Fed Minutes

Reuters

Bloomberg

Cointelegraph