Fed Minutes Reveal Growing Faction Worried Iran War Could Force Rate Hikes, Not Cuts
A growing number of Federal Reserve officials at the March FOMC meeting wanted to add language raising the possibility of interest rate hikes — not cuts — if the Iran war keeps inflation stubbornly above target, marking a significant hawkish shift even as most policymakers still expect one cut later this year.
The minutes of the March 17-18 Federal Open Market Committee (FOMC) meeting, released Wednesday, showed policymakers wrestling with starkly differing scenarios for the U.S. economy following the outbreak of the Iran war. The gathering occurred almost three weeks after Middle East hostilities caused global energy costs to surge, putting upward pressure on inflation while threatening to dampen economic growth.
The Hawkish Faction Grows
While most officials worried a protracted war could hurt the labor market and warrant lower interest rates, a vocal minority pushed for a more aggressive posture. The minutes revealed that “some participants judged that there was a strong case for a two-sided description of the committee’s future interest-rate decisions” — explicitly including the possibility that rate hikes could be appropriate if inflation remained above target.
In the Fed’s lexicon of so-called counting words, “some” refers to a larger number of officials than “several” — the word used in the January minutes. The size of the group supporting hike language has grown.
Echoing those concerns, the minutes noted the “vast majority” of officials thought it may take longer to return inflation to the Fed’s 2% goal. Inflation has now been running above target for five consecutive years, raising fears that longer-term expectations could become unanchored.
Two-Sided Risks
Stephen Stanley, chief U.S. economist at Santander Capital Markets, said the minutes showed the committee saw risks rising for both inflation and employment, leaving the FOMC wary of committing to any direction.
“A protracted conflict, not the baseline, could further exacerbate both of these risks,” Stanley said in a note to clients. “This left the FOMC firmly on the sidelines.”
The minutes explicitly warned that prolonged conflict in the Middle East would likely lead to more persistent increases in energy prices, which could push up underlying inflation. Some officials also highlighted the possibility that “longer-term inflation expectations could become more sensitive to energy price increases” — a nightmare scenario for central bankers.
Labor Market Vulnerabilities
At the same time, the committee expressed significant concern about the labor market. Most officials said they expected the unemployment rate to remain little changed, but the majority agreed that risks were skewed to the downside.
“In particular, many participants cautioned that, in the current situation of low rates of net job creation, labor market conditions appeared vulnerable to adverse shocks,” the minutes said.
Job growth has come almost exclusively from health care-related sectors, leaving the economy exposed if an oil price shock triggers broader layoffs.
The Ceasefire Complication
The meeting occurred before the recent ceasefire announcement. Since then, President Donald Trump has announced a ceasefire pact with Iran and direct talks scheduled for this weekend in Pakistan — a dramatic climbdown from earlier threats to unleash massive devastation on the country.
Yet sporadic fighting across the region, in addition to Iranian claims of ceasefire violations less than a day after the agreement, exposes the fragility of the truce. The six-week war has already triggered a global energy crisis, with the Strait of Hormuz remaining partially closed and hundreds of freighters stranded inside the Gulf.
What the Fed Actually Did
At the March meeting, officials held the Fed’s benchmark policy rate in a range of 3.5% to 3.75% — the same level since December. In projections released after the meeting, policymakers signaled an expectation for one interest rate cut in 2026, unchanged from their December forecasts.
However, investors are skeptical the Fed will cut at all this year, according to federal funds futures markets. The ceasefire has lowered the probability of a near-term cut, but the underlying inflation and labor market dynamics remain highly uncertain.
The Bottom Line
The minutes reveal a Fed deeply divided and fundamentally uncertain about the path ahead. The hawkish faction wants markets to know that rate hikes are possible if inflation remains stubborn. The dovish faction worries about labor market vulnerability and prefers cuts. The majority is firmly on the sidelines, waiting to see how the Iran war — and the fragile ceasefire — actually affects the U.S. economy.
For American consumers and businesses, the message is clear: don’t bank on rate cuts anytime soon. And don’t rule out hikes entirely. The Fed is watching, waiting, and prepared to move in either direction depending on how the next few months unfold.
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Writer: Sam Michael