The recently released minutes from the Federal Reserve's March policy meeting indicate that a growing number of policymakers are concerned that military conflict involving the U.S., Israel, and Iran could further increase inflation. Some officials suggested that under specific circumstances, a return to interest rate hikes could not be ruled out.

The minutes revealed that during the Federal Open Market Committee meeting held on March 17-18, officials engaged in vigorous debate regarding the economic impact of the conflict. A majority of members believed that a prolonged conflict could weaken the labor market, thereby supporting the case for interest rate cuts. However, many officials simultaneously emphasized that surging energy prices could create inflationary pressures significant enough to eventually compel a shift toward tighter monetary policy.

Some officials, expressing greater concern about inflation, proposed including language in the post-meeting statement referencing a "two-sided policy path." This phrasing would indicate that the federal funds rate could potentially be increased if inflation persists above the target level. The minutes noted that the number of officials supporting this view had increased noticeably compared to previous discussions.

Despite these concerns, the committee as a whole maintained a wait-and-see posture. The meeting concluded with a decision to hold the benchmark interest rate steady within the existing range of 3.5% to 3.75%. Analysts view this outcome as reflecting the complex balancing act the Fed faces between inflation risks and growth concerns.

The meeting occurred against a backdrop of Middle East conflict that has already driven up global energy prices, creating upward pressure on inflation while simultaneously threatening economic growth prospects. The minutes stated that a "substantial majority" of officials believed it would likely take longer to return inflation to the 2% target. Furthermore, long-term inflation expectations might become more sensitive to fluctuations in energy prices.

Regarding employment, most officials projected that the unemployment rate would remain generally stable. However, they acknowledged downside risks to the labor market, noting that the economy could become more vulnerable to external shocks, particularly against a backdrop of slowing job growth.

In terms of the policy outlook, the Fed maintained its previous expectation for one interest rate cut in 2026. Nevertheless, interest rate futures markets indicate that investor expectations for a rate reduction within the current year have diminished.

Notably, despite recent announcements of a ceasefire agreement with Iran and plans for direct negotiations, sporadic regional conflicts have continued. Reports of potential violations of the ceasefire agreement have contributed to ongoing uncertainty in energy markets and monetary policy prospects.