Iran War Upends Federal Reserve's Next Steps on Interest Rates

Spike in oil and gas prices presents Fed with difficult policy dilemma as it battles high inflation

Mar. 17, 2026 at 10:18pm

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The Iran war has scrambled the Federal Reserve's outlook on inflation and unemployment, likely delaying any interest rate cuts this year. The spike in oil and gas prices presents the Fed with a challenging scenario - higher inflation typically leads to rate hikes, but the economic impact could also push the central bank to cut rates. The Fed is expected to keep rates unchanged at its upcoming meetings as it waits to see how the situation plays out.

Why it matters

The Fed's policy decisions on interest rates have significant implications for consumers and the broader economy. Delayed rate cuts would mean continued high borrowing costs for things like mortgages and car loans, putting a strain on household budgets. The Fed is also grappling with high inflation, which it has struggled to bring down, and a potential economic slowdown from the oil price shock.

The details

The Fed is facing a difficult tradeoff - the spike in oil and gas prices will raise inflation in the short term, typically leading the central bank to raise rates. But if the price spike is high enough or lasts long enough, it could also harm the economy and push up unemployment, which would typically prompt the Fed to cut rates. For now, the Fed is expected to hold rates steady and wait to see which way the economy goes.

  • The Federal Reserve is meeting on Wednesday, March 22, 2026 to discuss monetary policy.
  • The Fed is also scheduled to meet in late April and June 2026.

The players

Jerome Powell

Chair of the Federal Reserve.

Chris Waller

Federal Reserve governor who has said inflation is heading back to the Fed's 2% target.

Beth Hammack

President of the Federal Reserve Bank of Cleveland, who was already concerned about persistent inflation before the Iran war.

Austan Goolsbee

President of the Federal Reserve Bank of Chicago, who was also worried about stubborn inflation prior to the Iran conflict.

Kevin Warsh

Former top Fed official who has been nominated by President Trump to replace Jerome Powell as Fed chair, though the nomination has been delayed.

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What they’re saying

“With Iran and the oil shock, I think the committee's room for maneuver here is pretty limited. I think they've got to wait and see how this plays through.”

— Nathan Sheets, Chief global economist at Citi and former senior economist at the Fed (ksgf.com)

“Any reasonable forecast for inflation now should not have a cut in the Fed's projections. And it's almost ludicrous that it might.”

— Tim Duy, Chief economist at SGH Macro (ksgf.com)

“Inflation is heading back to the Fed's 2% target, with the Iran war likely only a temporary disruption.”

— Chris Waller, Federal Reserve governor (ksgf.com)

What’s next

The Federal Reserve is expected to keep interest rates unchanged at its upcoming meetings in late April and June 2026 as it waits to see how the economic impact of the Iran war plays out.

The takeaway

The Federal Reserve faces a difficult policy dilemma in the wake of the Iran war, with the spike in oil and gas prices threatening to push up inflation even as it risks harming the broader economy. This complicates the central bank's efforts to balance its dual mandate of price stability and maximum employment, and will likely lead to a pause in any interest rate cuts this year.