MW Any chance the Fed cuts rates this year is 'evaporating before our very eyes' as Iran tensions raise oil prices

By Greg Robb

Experts see high potential for a military strike

President Donald Trump greets members of the Joint Chiefs of Staff as he arrives to deliver his State of the Union address on Tuesday.

With oil prices rising in response to growing tensions with Iran, the rationale for additional interest-rate cuts by the Federal Reserve is disappearing.

"The argument for having lower rates is just evaporating right before our very eyes," said Brian Bethune, an economist at Boston College, in an interview. The uptick in oil prices combined with the Trump administration's aggressive approach to tariffs is putting upward pressure on inflation, complicating any Fed rate cut, he said.

Over the past several months, the Fed has struggled to tamp down inflation amid pressure from the White House and the markets to cut rates. These latest developments only add to the central bank's challenges.

Prices at the wholesale level started to accelerate in December and are running at a 3% annual rate, frustrating Federal Reserve officials who hoped that the taxes on imports would only have a transitory impact on inflation. It's likely that the increase in producer prices will soon be passed on to consumers, said Ethan Harris, former chief economist at BofA Securities, in a note on LinkedIn.

Inflation is looking like it is heating up in the first quarter, agreed Scott Anderson, chief U.S. economist at BMO Capital Markets. Core personal-consumption expenditures could rise to 3.1% annual rate in January, the highest rate in two years - and that's before any impact from a potential U.S. strike on Iran. The Fed's target for inflation is 2%.

Any $10 increase in crude-oil prices is estimated to raise consumer-price inflation by 0.2% to 0.4% over the coming year, Anderson said.

WTI crude-oil futures (CL00) (CLJ26) are up about 16% year to date, or $10 per barrel since the beginning of the year.

"Just the growing risk of a conflict with Iran is already impacting energy markets and prices, adding to U.S. inflation pressures and creating major headwinds for further Fed rate cuts," Anderson said.

A prolonged conflict might raise the possibility that the central bank's next move would be to raise interest rates, he added.

"You're really talking about problems for the Fed in terms of putting a lid on inflation," Bethune said. "In this situation, the Fed can't lower rates."

Traders in derivate markets still expect two quarter-point rate cuts this year, with the first coming in June and the second in September.

Both tariffs and oil prices are supply shocks, raising the costs of inputs into production of the economy, which are very hard for the Fed to cool.

The Fed's interest-rate tool works more on the demand side of the economy, by either spurring companies and consumers to spend or nudging them to pull back.

Military action in Iran is likely, analysts say

Oil prices are expected to spike if there is any attack on Iran, with the only debate about how long the higher prices might last.

Analysts see a very high potential for some kind of military strike on Iran in the coming weeks.

There has been a "slow-motion effort" to get U.S. military assets in the Middle East region since January, said Suzanne Maloney, director of the Foreign Policy program at the Brookings Institution.

U.S. military action against Iran "seems more likely than not," said Christopher Granville, managing director of TS Lombard, a macroeconomic forecasting consultancy firm based in London.

Granville said a military confrontation between the U.S. and Iran is unlikely to send the global economy into a full-blown oil crisis and stagflationary shock. Still, it's possible we'll face an "oil squall" similar to what happened after Russia invaded Ukraine in early 2022, when oil prices surged over $100 a barrel and remained high for six months.

That so-called squall was enough to fuel inflation in the U.S., with the core PCE price index rising at an annual pace of 5.6% in September 2022, the highest rate in almost 40 years.

Still, many economists say it's hard to forecast the future in the Middle East and how any confrontation would impact oil prices. Bank analysts still expect 2026 average prices to remain around the low $60-a-barrel range.

Karen Young, senior research scholar at the Center for Global Energy Policy at Columbia University, said any price spike depends on whether the Iranian regime strikes oil-production facilities of its neighbors in the Middle East in response to U.S. action.

Iran also has the ability to disrupt the flow of oil through the Strait of Hormuz, a crucial maritime passage connecting the Persian Gulf with the Gulf of Oman and the Arabian Sea.

Vali Nasr, a professor at the Johns Hopkins University's School of Advanced International Studies, thinks it is likely that Iran tries to hit its neighbors.

The Iranian government's conclusion is that if President Trump calculates that war is cost-free, "he's going to continue doing it," Nasr said during a discussion of the conflict earlier this week sponsored by the Chicago Council on Global Affairs.

-Greg Robb

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February 28, 2026 07:00 ET (12:00 GMT)

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