The US Federal Reserve is expected to hold interest rates steady next week, caught between rising inflation risks from war and emerging labour market weakness.
WASHINGTON: US Federal Reserve policymakers are widely expected to hold interest rates steady at their meeting next week. The escalating US-Israel war with Iran is sending shockwaves through markets while recent economic data has begun to show signs of weakness.
The central bank will begin its two-day meeting on Tuesday. An announcement on the benchmark lending rate for the world’s largest economy is expected a day later.
With war in the Middle East causing global oil prices to spike, analysts say policymakers are unlikely to make any moves now. The conflict risks increasing overall inflation while simultaneously curbing economic growth.
“This is certainly a bind for the Fed, because supply shocks are extremely hard to deal with in that they lift inflation and they curb output,” EY-Parthenon chief economist Gregory Daco told AFP.
The Fed has a dual mandate of holding inflation near a long-term target of 2% while ensuring maximum employment. While consumer inflation has dropped from a peak of 9.1% during the Covid pandemic, it remains well above that target.
“Unlike other countries, which have already achieved some level of price stability, we’re five years in without price stability,” said Diane Swonk, chief economist at KPMG.
She warned that depending on how long the Iran war lasts, inflation could again soar past 4%. “I think the main story here is that we are seeing inflation moving away from the Fed’s two-percent target, and that will lead many Fed policymakers to adopt an even more hawkish stance,” Daco added.
Raising rates to cool inflation, however, could bring the Fed into tension with its other mandate. The United States unexpectedly lost 92,000 jobs in February, while the unemployment rate rose to 4.4%.
Analysts say a relatively steady unemployment rate has been masking churn beneath the surface. Labour demand has been dropping, but unemployment has not spiked because that has been accompanied by a drop in supply due to former President Donald Trump’s immigration crackdown.
Daco said labour demand gauges were showing signs of concern, including a weak hiring rate “at a decade low,” slowing wage growth and business leaders talking about labour replacement due to AI. Swonk noted that spiking uncertainty due to war in Iran would further curb labour demand.
“Uncertainty acts as its own tax on the economy, and one of the first lines of defense that firms do is they freeze hiring,” she said.
Recent data ahead of the Fed meeting has not been encouraging, with US GDP growth revised sharply lower in the final months of 2025. Some Fed policymakers, however, have been cautious in describing the possible inflationary shocks of the war.
Fed Governor Christopher Waller expressed sympathy last week for consumers facing spiking gasoline prices. “But for us thinking about policy going forward, this is unlikely to cause sustained inflation,” he said.
Swonk warned that any economic slowdown from the war could be tough to recover from immediately. “I think people are discounting the risk of the lingering effects,” she said, noting that supply disruptions affect more than oil prices.
“There’s no question they’re between a rock and a hard spot, and it just got harder,” Swonk said of policymakers balancing inflation and unemployment.
To Daco, the prevailing uncertainty means the Fed is more likely to hold rates steady “for a long period of time.” Traders have begun to reduce their outlook for rate cuts, and Swonk said that hikes could even be on the menu.
“This is not a one-way street. We’re at a busy intersection, and the stoplight’s broken,” she said.
The Sun Malaysia
