Fed official issues stark warning on inflation, rate-cut outlook

Federal Reserve Governor Michael Barr said that although he was “hopeful” inflationfalls this year, that ​might not happen with higher oil prices spiking gasoline and other consumer costs.

Barr’s take mirrors increasing concerns from Main Street to Wall Street about the Fed’s interest-rate outlook due to recessionary and inflationary uncertainty.

“While I am hopeful that inflation will fall as the effects of tariffs on prices wane later this year, I would like to see evidence that goods and services price inflation is sustainably retreating before considering reducing the policy rate further, provided labor market conditions remain stable,’’ Barr said in prepared remarks March 24. 

“Moreover, the conflict in the Middle East raises additional risks. Higher oil prices tend to pass through pretty quickly to gasoline prices, and higher gasoline prices can be particularly painful for low- and moderate-income families,’’ Barr said.

Even before the outbreak of the Iran war, the Fed faced a dilemma from worrisome risks to both sides of its congressional mandate: unemployment rates and sticky inflation from tariffs.

Several Wall Street firms say inflation will now be closer to 3% this year than the Fed’s 2% target, Bloomberg reported March 25, eating into disposable incomes and keeping a lid on hiring.

That’s a shift from what was supposed to be a strong year in 2026 as the inflationary shock of President Donald Trump’s tariffs faded and stimulus from tax cuts kicked in, according to Bloomberg. 

Even if the Iran war ends soon, economists say the damage already done will keep the U.S. economy on a narrow footing, with job seekers and lower-income consumers alike continuing to struggle as its ripple effects upend prices and jobs.

“Lots of elements of the economy are going to be weaker because of this war,” said Nancy Vanden Houten, the lead U.S. economist at Oxford Economics .

What the Fed dual mandate requires for jobs, prices

The Fed’s dual congressional mandate requires it to balance full employment and price stability.

Lower interest rates support hiring but can fuel inflation.Higher rates cool prices but can weaken the job market.

The two goals often conflict, operate on different timelines and are influenced by unpredictable global events including pandemics and wars. 

Fed eyes inflation risk from Iran war

As I previously reported, the Federal Open Market Committee voted 11-1 on March 18 to hold the benchmark federal funds rate steady at 3.50% to 3.75%.

It was the FOMC’s second pause after cutting rates by 0.75% during its last three meetings of 2025, due to a weakening labor market.

The pause underscores the rising central tension driving U.S. monetary policy.

More Federal Reserve:

Global central banks signal shocking shift on interest-rate bets

Now, investors are debating not whether risks to the Fed’s dual mandate exist, but which risk matters more to the U.S. economy.

On one side, inflation remains stubborn. Producer prices came in hotter than expected March 18, showing acceleration that began before the Iran war erupted.

The risk? Inflation could reaccelerate rather than continue its slow drift toward the Fed’s 2% target.

In addition, economic drive is showing signs of weakness. The softening labor market and slowing growth would typically prompt interest-rate cuts. 

This was a path markets had been expecting from the Fed at the start of the year.

“Everyone’s very concerned about how long it’s going to take before things are settled,” Jennifer Lee, a senior economist at BMO Capital Markets, told Bloomberg March 25. “Even if it does get settled today, it’s going to take some production. It’s going to take a long time to have things restart.”

Federal Reserve Bank of New York via FRED®

Iran war ignites U.S. stagflation, recession concerns

The Iran war, by driving energy costs sharply higher, has reopened the traditional stagflationdilemma of rising prices with slowing growth.

Fed Chair Jerome Powell last week downplayed stagflation fears, yet Wall Street is growing increasingly uneasy as rising energy prices tied to the Iran war threaten to reignite inflation and jolt the U.S. economy into a recession.

Moody’s Analytics in a new note forecasts a near 50% chance of an economic downturn in the next 12 months, far higher than the typical 20% baseline.

Others, as first reported by CNBC March 25, have also lifted their forecasts.

Wilmington Trust:45%Goldman Sachs:30%EY Parthenon:40%, with the caveat that “those odds could rapidly rise in the event of a more prolonged or severe Middle East conflict.”

“I’m concerned recession risks are uncomfortably high and on the rise,” Moody’s Analytics Chief Economist Mark Zandi said. “Recession is a real threat here.”

He and others say a diplomatic resolution to the Iran war that restores oil flows could prevent the worst-case scenario.

Wall Street pushes back on cloudy Fed rate outlook

In its March 18 statement, the FOMC said “uncertainty about the economic outlook remains elevated,’’ since “implications of developments in the Middle East for the U.S. economy are uncertain.’’

The Fed’s March median Summary of Economic Projections or “dot plot” calls for a single quarter-point rate cut in 2026, and an additional quarter-point cut in 2027, the same as the December 2025 forecast.

Powell noted that the rate cut was not guaranteed, especially if the projected decrease in inflation doesn’t occur. 

Related: Fidelity delivers sobering interest-rate message amid Fed pause

That ⁠outlook, however, has been called into doubt given the high price of oil, with investors now expecting the Fed to ⁠stay ​on hold and an increasing possibility ​seen of the U.S. central bank raising rates before year’s end.

As I’ve reported, Morgan Stanley, Fidelity and J.P. Morgan have pushed back on the “dot plot” projections, arguing that the longer-term impact of the energy shock from rising oil prices will upend the Fed’s rate-cut forecasts.

“While the Fed didn’t take rate cuts completely off the table, the rates market did,’’ Morgan Stanley wrote in a recent note. “Powell’s focus on inflation risk and similar concerns from other central banks this past week to bond market pricing to a 40% chance of a Fed rate hike by October.”

The CME Group FedWatch tool on March 25 called for a 4.1% chance of a quarter-point hike at the Fed’s April 29 FOMC meeting, down from 10.6% chance the previous day. It also calls for a 95.9% probability the FOMC will hold rates steady at 3.50% to 3.75%.

Barr forecasts Fed holding rates steady “for some time”

Barr said he supported the FOMC decision to pause interest rates this month.

“It is my view that we may need to keep rates steady for some time as we assess economic conditions,’’ he said, adding that the labor market “appears to be stabilizing with low levels of job creation, and also low levels of people entering our workforce.”

Apart from the energy shock of the last month, he noted that the central bank continues “to contend with inflation notably above the FOMC’s 2 percent goal. Goods inflation escalated over the last year, and non-housing services inflation has remained elevated.” 

Fed Vice Chair for Supervision Michelle Bowman said March 20 in an interview on Fox Business that she still forecasts three interest-rate cuts in 2026 to support the labor market.

Bowman said she expects strong economic growth this year but is also keeping an eye on the impact on the Iran war.

“It’s too soon to tell what the impacts of Iran and the conflict may be, but I do expect that we’ll start to see some of the supply-side policies working their way through the economy,’’ Bowman said.

Related: Morgan Stanley issues stark warning on Fed rate outlook

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