Following the February inflation report showing a steady 2.4% rate, the Federal Reserve is proceeding with extreme caution as the war sends energy prices soaring. Policymakers are wary of repeating past errors when they misidentified high inflation as “transient.” With gas prices rising 20% in a single month, the central bank is likely to delay any planned interest rate cuts.
The economic data is currently presenting a contradictory picture. On one hand, the job market is showing signs of distress, with 92,000 positions lost in February and unemployment rising to 4.4%. On the other hand, the cost of energy and groceries—up 0.4% in February—continues to rise, suggesting that inflation is far from being under control.
The shutdown of the Strait of Hormuz has created a global oil supply crisis, with prices fluctuating wildly. This volatility makes it nearly impossible to forecast how big the ultimate impact on the U.S. economy will be. If shipments do not resume within the next week, the inflationary pressure will likely spread to all corners of the market, including air travel and shipping.
Economists note that while the Fed might normally view an oil shock as a temporary event, the current political and economic climate makes them reluctant to lower borrowing costs. In fact, some officials had already suggested the need for further rate hikes before the war even began. This hawkish stance is a direct result of the central bank’s desire to avoid being caught off guard by runaway prices.
As Americans face the largest jump in gas prices since the start of the decade, the political pressure is mounting. Lawmakers are keeping a close eye on “affordability” ahead of the midterms, as years of high prices have already exhausted many households. The upcoming March inflation report, due in early April, will be a critical indicator of the war’s lasting economic damage.