Most Fed officials see upside inflation risks rising from the Middle East conflict, but are split on whether the next move should be a cut or a hike
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Minutes from the Federal Reserve's March 17–18 meeting show that policymakers were divided over how a prolonged conflict in the Middle East could affect inflation and the path of interest rates, with some officials raising the possibility of rate increases while others continued to favor cuts.
At that meeting, an 11-1 majority on the Federal Open Market Committee elected to leave its target range for the federal funds rate unchanged at 3.5% to 3.75%. The minutes, released Wednesday, reveal that the vast majority of participants judged that upside risks to inflation and downside risks to employment had both increased because of developments in the Middle East.
The minutes show the internal tension clearly. Many participants pointed to the risk of inflation staying elevated longer than expected amid a persistent rise in oil prices — a scenario that, they said, could call for rate increases to bring inflation back to the Fed's 2% target. At the same time, most participants raised the concern that a drawn-out conflict could weigh on hiring, reduce household purchasing power, and slow global growth — which would argue for cuts.
Some participants went further, arguing that the postmeeting statement should describe the committee's future rate decisions as explicitly two-sided, reflecting the possibility that hikes could become appropriate if inflation remained above target.
Front-month crude oil futures rose about 50% over the intermeeting period, the minutes said. The one-year inflation swap rate climbed almost 50 basis points, though forward inflation measures beyond one year were little changed — suggesting markets viewed the energy shock as temporary.
Market pricing shifted over the same period. Futures implied that a rate cut would not be fully priced in until December, and options markets put the modal path at no rate change in 2026, compared with one cut previously. The probability of a rate hike through early next year rose to about 30%, according to the minutes.
Most participants said it was too early to assess the war's full economic impact and favored monitoring the situation before adjusting policy. A quarter-point reduction was preferred by Governor Stephen Miran, the lone dissenter, who argued that policy was still too tight and was putting downward pressure on employment.
Staff projections prepared for the meeting showed inflation running slightly higher than the January forecast, driven by incoming data and higher energy costs. Projections nonetheless showed inflation converging back toward the 2% target over subsequent years, with energy and tariff pressures expected to dissipate.
The Fed held rates at its March meeting as policymakers weighed inflation that has run above the 2% target for five years against an uneven labor market. None of the inflation data available at the time of that decision captured price increases tied to the war, which disrupted the Strait of Hormuz and pushed Brent crude above $108 a barrel. Fed Chair Jerome Powell subsequently said the central bank did not yet need to raise rates in response to the oil shock, noting that longer-run inflation expectations had so far remained stable — removing what he described as the most pressing reason to tighten policy.
All participants agreed that monetary policy was not on a preset course and would be determined on a meeting-by-meeting basis. The committee's next meeting is scheduled for April 28–29, 2026.
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