Fed to Hold Rate Amid Inflation Risks from Middle East Conflict
The Fed is expected to leave interest rates unchanged for the third consecutive time in the 3.5%-3.75% range amid high uncertainty caused by the Middle East crisis. Markets estimate the probability of rates staying at current levels through end-2026 at roughly 80% due to rising oil prices.
Fed Frozen in Anticipation: How the Middle East Conflict Is Freezing US Monetary Policy
Introduction
On April 29, 2026, the US Federal Reserve held its key interest rate steady in the 3.5%–3.75% range for the third straight time. This decision, fully expected by markets, nonetheless marks a turning point in modern monetary history: for the first time in a long while, a geopolitical factor has become not just a "backdrop" but the main conductor of Fed policy. The Middle East conflict, the closure of the Strait of Hormuz, and the ensuing energy shock have effectively stripped the Fed of its ability to pursue independent policy. The central bank is trapped: inflation has accelerated to 3.3% year-over-year, but raising rates to curb it is impossible—that would finish off an already fragile economy. Cutting rates is also impossible because prices continue to rise. The April meeting was likely the last for Chairman Jerome Powell, who steps down on May 15, and his farewell press conference may provide clues to where the world's largest economy is headed under an "oil blockade."
Event Details and Timeline
Events unfolded rapidly. As recently as January 2026, markets were pricing in at least two rate cuts by year-end. However, the escalation of the Middle East conflict into direct military action involving the US and Israel against Iran radically changed the landscape. The key moment was the closure of the Strait of Hormuz—a narrow maritime corridor through which about 20% of global seaborne oil and liquefied natural gas trade passes. The blockade, imposed by Iranian forces, effectively began on March 2, 2026.
The consequences were immediate. Brent crude, which traded around $60–65 per barrel before the conflict, soared above $100 within weeks, occasionally hitting $110–120. The Fed's March meeting (March 17-18) already took place under shock conditions. The minutes of that meeting recorded a key shift: most participants discussed not only a pause in rate cuts but also the need for hikes if the conflict dragged on. In the March statement, the Fed raised its core PCE inflation forecast for end-2026 from 2.4% to 2.7%.
The April meeting (April 28-29) was a logical continuation. Traders in CME derivatives markets priced in a 100% probability of a hold. Consensus forecasts from major banks left no doubt. Deutsche Bank, which previously expected a 25-basis-point cut in September, revised its forecast to "no change through year-end." JPMorgan and HSBC joined that view. Even Bank of America, which still forecasts two cuts, acknowledges that "upside risks to rates from the Iran war have not disappeared."
The most interesting aspect of the April meeting is not the decision itself but the context. It was likely the last for Jerome Powell. His term expires on May 15, and the Senate is preparing to confirm Kevin Warsh as his successor, whom Donald Trump reportedly urged toward looser policy. But now Warsh inherits an economy "heated up" with inflation stoked by expensive oil and his hands tied.
Impact and Significance (for the World / Industry / Society)
The significance of these events extends far beyond monetary policy itself. 2026, according to experts, has finally buried the era when geopolitics was merely a backdrop for markets. Today, the Middle East conflict has become the central macroeconomic driver.
Energy and Commodity Shock. The closure of the Strait of Hormuz is not just about rising gasoline prices. It is a structural disruption of global logistics. As analysts note, besides oil, huge volumes of LNG (primarily from Qatar) and petrochemical feedstocks pass through the strait. As a result, European TTF gas prices spiked above $800 per thousand cubic meters. But the most underestimated effect is on the fertilizer market. The Middle East, particularly Qatar (company QAFCO), produces up to 40% of global nitrogen fertilizer trade. Export halts due to force majeure have driven US fertilizer prices up more than 50%. This is a direct path to a new round of food inflation that will hit all countries, including the poorest.
Stagflation Risks for the US. The US economy is caught between a rock and a hard place. On one hand, the March CPI inflation jump to 3.3% (from 2.4% in February) was driven precisely by a 12.5% rise in energy prices. Moreover, as Fed Governor Christopher Waller warns, prolonged high oil prices could cause inflation to "embed itself in a broad range of goods and services," affecting core inflation. On the other hand, labor market risks are already real. The March meeting minutes noted that most participants believed a prolonged conflict would hurt business confidence and lead to reduced hiring. This is a classic stagflation picture: rising inflation and a slowing economy. As one analyst notes, the Fed may face the need to address "a dual problem—high inflation and a weakening labor market, which is very difficult for central bankers."
Global Fragmentation. The conflict is reshaping capital flows and supply chains. As highlighted in analysis, the key constraint becomes "physical availability of energy, fertilizers, and raw materials." Europe, heavily dependent on Middle Eastern diesel and jet fuel, has been thrown into "absolute chaos": jet fuel prices at Northwest European ports surged 20% in a single day. Russia, conversely, has an opportunity to boost diesel and jet fuel exports using its spare capacity. Asia, China, and India are urgently rerouting flows and seeking alternatives. The world is finally fragmenting into regional energy blocs.
Reactions of Key Players
Fed and Jerome Powell. Powell himself has had to navigate carefully in recent months. As recently as January, he spoke of "solid growth" and a stabilizing labor market. Now his rhetoric is full of references to "uncertainty." As analysts at TD Securities note, at the April meeting he will likely maintain a "neutral policy stance" and refrain from new comments. However, his April 29 press conference will probably be his farewell, and markets will hang on every word about the prospects for rate hikes. Some FOMC members, including St. Louis Fed President Musalem, have already stated that if high oil begins to boost core inflation and "unanchor" inflation expectations, it may become "appropriate to raise rates."
Major Banks. There is a split that accurately reflects the depth of uncertainty. Hawks: Deutsche Bank, JPMorgan, HSBC completely rule out a rate cut in 2026. BofA still forecasts two cuts but acknowledges they are in doubt. Analysts at BNY Mellon see a cut only at year-end and only if the Strait of Hormuz reopens and the labor market weakens. Meanwhile, Goldman Sachs and Morgan Stanley still expect two cuts. Such divergence among top banks says one thing: no one understands anything, and everyone is watching not charts but news from the Middle East.
International Organizations. IMF Managing Director Kristalina Georgieva issued a dire warning, saying disruptions at the Strait of Hormuz could "affect up to 20% of global oil and gas supplies and trigger a chain reaction in global markets." According to the International Energy Agency, restoring production and logistics even after stabilization could take up to two years. That is, the energy shock risks being not short-term but long-term.
Forecast and Conclusions
What do we have at the end? The Fed is frozen. Its policy is completely hostage to geopolitics. Markets currently estimate the probability of rates staying at current levels through end-2026 at roughly 80%. But this could change at any moment. There are three main scenarios.
First (optimistic but unlikely): The Strait of Hormuz reopens within weeks, oil prices plummet to $60-70. In this case, inflation expectations decline, and the Fed has room for one or two rate cuts in Q4 2026, as BNY analysts suggest. However, given the rigidity of the parties' positions, this scenario looks fantastic.
Second (baseline, worrying): The blockade continues for several months. Oil stabilizes in the $90-110 range. US inflation settles at 3.5-4% and begins to seep into core measures. Unemployment starts to creep up due to falling business activity. The Fed is stuck: raising rates is impossible (would kill the economy), cutting is even more impossible (would fuel inflation). Rates stay at 3.5-3.75% through end-2026 and even into 2027. This is a "hawkish pause" that effectively means mild stagflation.
Third (pessimistic but already discussed): Escalation continues, oil settles above $120. US inflation accelerates to 5%+. The Fed is forced to act classically—raise rates to curb inflation, even at the cost of recession. As the St. Louis Fed president explicitly stated, such a scenario "may prove appropriate." Deutsche Bank no longer considers a hike "unlikely" in 2026. In this case, the US dollar would strengthen sharply, and a global recession would become inevitable.
Powell's farewell meeting is not just a technical decision. It is a moment of truth. It shows that the era of predictable monetary policy is over. Central banks no longer manage inflation—missiles and blockades do. As one analyst rightly noted, "markets are now pricing not so much economic data as the military map in the Strait of Hormuz." And until that strait reopens, the Fed and other global central banks will simply watch their instruments lose effectiveness in the face of raw geopolitical force.
— Editorial Team
