Updated The Federal Reserve held interest rates steady as policymakers weighed the economic fallout of escalating conflict across the Middle East and a renewed surge in global energy prices.
The Federal Open Market Committee voted 11-1 to maintain the federal funds target rate in the 3.5% to 3.75% range following the conclusion of its two-day meeting on 18 Mar, in line with broad market expectations.
The central bankers made only a minimal reference to the US's war in Iran in its official communications. They described the implications for the US economy as "uncertain" despite widespread expectations that surging energy prices triggered by the war and the choking of global trade via the Strait of Hormuz could raise consumer prices.
US inflation will likely increase by 2.7% in 2026, according to the Fed's updated projections. That's 0.3% higher than the 2.4% hike foreseen in last December's advice.
Speaking to reporters after the decision was announced, Chair Jerome Powell said that while the jump in oil prices from the Middle East conflict was partially behind the higher inflation expectations, the lack of progress on goods inflation and the effect of tariffs meant the committee was yet to be convinced that a rate change was warranted.
"If we have a long period of much higher gas prices, that is going to weigh on consumption and disposable personal income. But we don’t know if that is going to happen; we might have lower than expected pass-through," he said.
"I wouldn’t say there was a conviction that this is going to pass quickly or not…we don’t debate what the length or size of these effects would be, we just have to make an individual statement.
"Meanwhile, growth has been solid, with the inflation overshoot mainly from goods and tariffs. The unemployment rate is little changed since September, with little growth in jobs, but the US economy is doing pretty well. We just don’t know what the effects of this will be, and really, no one does."
The policy decision arrives as global oil prices surge above $100 per barrel, raising alarms over renewed inflationary pressures and complicating the trajectory for monetary easing later this year.
Inflation risks reshape monetary outlook
The sudden spike in energy costs has emerged as the primary catalyst influencing the restrictive stance. Higher oil prices threaten to bleed into broader consumer inflation, potentially unwinding recent progress on price stability across the US economy, macro analysts warn. The central bank has spent the past two years battling to bring inflation down to its target, and this latest geopolitical shock threatens to stall that mandate entirely.
The geopolitical deterioration has also dampened expectations that the central bank could commence rate cuts in the near term. The hawkish hold compounds growing anxieties regarding a weakening macroeconomic outlook after revised figures showed the US annual growth rate slumped to 0.7% during the final quarter of 2025.
Market pricing heavily reflects this defensive shift. The implied probability that interest rates will remain pinned in the current 3.5% to 3.75% range through the remainder of 2026 has skyrocketed to 98%, up from 77% on 5 Feb, according to CME FedWatch data. The aggressive repricing suggests institutional investors increasingly expect policymakers to maintain a restrictive posture for much longer as geopolitical friction persists.
Global central banks assess crypto resilience
The domestic policy hold sets a cautious tone ahead of a critical series of international monetary announcements in Europe. The European Central Bank, Bank of England and Swiss National Bank are all scheduled to deliver their respective rate decisions on 19 Mar.
The synchronized rates pause reinforces a defensive global policy backdrop as central banks evaluate the economic drag of elevated energy costs and persistent geopolitical uncertainty. While traditional safe haven assets have absorbed significant capital flows, cryptocurrencies have demonstrated more limited defensive characteristics during this period of macroeconomic stress.
Bitcoin traded above $74,000 earlier this week, supported in part by renewed institutional capital inflows into US-listed exchange-traded funds. Ether also trended higher to breach the $2,200 level.
