Fed to delay rate cuts as war clouds the outlook in World Economy News 15/03/2026 Rising inflation constrains the Fed The outlook for Federal Reserve policy changes has been upended by events in the Middle East. Financial markets have swung from anticipating two 25bp rate cuts this year to now pricing in barely one. Markets are solidly backing a no-change outcome on Wednesday, 18 March and we agree. The military action in Iran and the resulting reluctance of shipping to navigate the Strait of Hormuz has led energy prices to spike higher. While the US itself gets very little crude oil from the Persian Gulf and is self-sufficient in natural gas, prices for oil are set globally. We are already seeing US retail gasoline prices up above $3.60 per gallon with the real prospect of the national average pushing imminently towards $4.25/gallon. This will put up supply and distribution costs, with airline fares also likely to push higher. The longer that the disruption lasts, the greater the chance it lifts prices in other sectors, including fertiliser, food prices and the cost of plastics. In consequence, we are now looking at inflation moving towards 3.5% by the summer, well above the 2% target. The impact on growth and jobs is less clear-cut at this stage. The ISM business surveys for February were at levels historically consistent with 3% GDP growth, but the news on jobs is not as rosy. The February jobs report showed the economy shed 92,000 jobs with the unemployment rate rising to 4.4%, suggesting the Fed’s decision to remove the assessment that “downside risks to employment rose in recent months” from the January FOMC statement, was premature. A ramping up of geopolitical and economic uncertainty is not going to help bring better news on jobs and will do little to boost activity outside the US’ energy sector. Fed to signal a delay to rate cuts Given this situation, we will be closely watching the Fed’s new forecasts. In December, the Fed were pencilling in one rate cut in 2026 with one further 25bp cut in 2027. There is huge uncertainty over how long and how intense the conflict and the disruption will be, so the Fed will have little conviction in their forecasts. Fed Chair Powell will be certain to underline the challenges in setting policy in this situation at the press conference. Nonetheless, we suspect they will trim growth marginally, push up their inflation forecast and then delay the 2026 rate cut until 2027. Risks still skewed towards lower rates We have been forecasting two rate cuts for September and December, but as the market has already done, we acknowledge the risk is that they are delayed into next year. While the Fed has a dual mandate of price stability and maximising employment, a central bank needs to defend its inflation credibility, and it is difficult to justify rate cuts when inflation is above target and rising further away from it. The Fed’s position in early 2022 was that inflation is transitory during a supply shock, and they needn’t raise rates. However, robust hiring, soaring wage growth, pent-up demand coming out of lockdowns and stimulus checks meant consumer spending jumped significantly and inflation spiralled higher. The Fed then had to play catch-up, hiking rates 525bp between March 2022 and July 2023. Today, the labour market is in a far weaker position with job creation and real household disposable income stalling over the past six months. At the same time, confidence has been eroded by tariff worries