The Best We Should Hope For From the Fed: Nothing

The Federal Reserve didn’t lower interest rates at its meeting this week. With a war driving up energy prices, the markets will need to hope that the Fed doesn’t do so in the months ahead, because a rate cut would be a sign that the economy is in deep distress.

It’s true that at their current level, interest rates aren’t providing much, if any stimulus to the economy, which is looking vulnerable. U.S. employers cut more jobs than they created in February, overall economic growth has been weak and inflation was higher than anyone would desire, even before the start of the U.S. and Israeli attacks on Iran. The stock market has stalled, too. All things being equal, lower interest rates could provide a welcome boost.

But the double whammy of the war in Iran and the Trump administration’s revived tariffs are putting upward pressure on prices, both in the United States and the rest of the world. The oil shock set off by Tehran’s retaliatory strikes in the Persian Gulf region — especially, in the Strait of Hormuz — are already beginning to have painful effects.

Under these circumstances, the Fed has little real choice. It projected one more rate cut later in 2026. But it has to wait to see how high prices will go — and the answer still isn’t clear. “The thing I really want to emphasize is that nobody knows,” Jerome H. Powell, the Fed chair, said in a news conference on Wednesday.

Since the start of the war, energy prices, including those of oil, gasoline and liquefied natural gas, have been rising sharply. A range of other global commodity prices have also moved higher since the start of the war in the Gulf. Fertilizer, which is critical for farming and food security, has become more expensive, too. Asian countries are particularly hard hit by the oil cutoff, and European countries by the shortage of liquefied natural gas.

These costs will ripple through the global economy in coming weeks and while the United States, a major energy producer, is more insulated than many countries, it is still imperiled. For the Fed, cutting interest rates while inflation is accelerating would be a dangerous gambit. We don’t yet know how long the war in Iran — and the mounting oil shock — will last. Oil prices, already up more than 45 percent this month, could easily climb much further.