Iran war heightens affordability issues ahead of March Fed meeting
Due to the war in Iran, inflation pressures, a weakening employment market and the uncertain outlook for tariff policy, Fed officials will meet next week and announce a decision on interest rates.
The federal funds rate, set by the Federal Open Market Committee, is the rate at which banks lend to each other overnight, but it also has a trickle-down effect on many consumer borrowing and savings rates.
Experts think the central bank will remain on hold for now. Futures market pricing offers almost no chance of a rate cut, according to CME Group report FedWatch measures.
“Fed officials will do whatever they can until they get clarity on how the war with Iran is progressing and which of the Fed’s missions (low and stable inflation or full employment) is most at stake,” said Mark Zandi, chief economist at Moody’s. “This could take weeks, if not two to three months.”
For consumers stuck in the crosshairs, this means there will be little relief. “Anyone expecting the Fed to step in and save the day anytime soon will likely be disappointed,” said Matt Schulz, chief credit analyst at LendingTree.
Meanwhile, “The attack on Iran has made life more expensive and more uncertain for Americans,” said Brett House, an economics professor at Columbia Business School. “In addition to oil and gasoline prices, the yields on 10-year Treasury bonds, a proxy for mortgage interest rates, also increased.”
The consumer price index, or CPI, a key measure of inflation, rose 2.4% in February from a year earlier, according to the latest readings from the Bureau of Labor Statistics. But that was before that Iran warcaused energy prices to rise and fueled long-term investments inflation fears.
Economists say higher oil prices could further complicate the inflation picture in the coming months, as these increases will be reflected in airfare, transportation and other costs.
Brent crude futures briefly hit $100 a barrel again on Thursday, and the national average gasoline price rose 22% from a month ago to $3.59 a gallon. AAA.
Inflation pressures that emerged after the joint US-Israeli attack also pushed the yield of the benchmark bond. 10 year Treasury – Barometer of mortgage rates – up to 4.173%.
“Nothing about this war makes life any more affordable for average Americans,” House said.
‘Rockets and feathers’ effect
Even if the war is over”“Very soon,” as President Donald Trump has said, and these rallies are proving to be short-lived; when oil prices fall, gasoline prices may fall more slowly.
Economists call this the “rockets and plumes” effect, according to a research note published Thursday by Sung Won Sohn, a professor of finance and economics at Loyola Marymount University and chief economist at SS Economics. “Gas prices are rising like a rocket but falling like a feather,” he wrote.
Because fuel distributors buy gas from refineries and store it before selling it to consumers, they may be clearing stocks purchased at high prices long after crude oil supplies have stabilized. “Until inventory is replaced with cheaper fuel, prices at the pump tend to decline gradually rather than immediately,” Sohn wrote.
Even before the expanding US war in the Middle East fueled inflation fears, the high cost of living and softening labor market had created affordability shortages for many US households.
The U.S. economy lost jobs in February and the unemployment rate rose to 4.4%, the Bureau of Labor Statistics reported Friday.
“The Federal Reserve and the Treasury Department are likely examining options to ease the burden on households, although the tools available are limited,” said certified financial planner Stephen Kates, a financial analyst at Bankrate.
“The Federal Reserve’s mission has become more complex,” Kates said. “Although the labor market showed signs of weakness in February, concerns about rising inflation will likely prevent the Fed from cutting rates at either of its next two meetings.”
