The war with Iran was expected to last four or five weeks, but Tehran’s reaction—a blockade of the Strait of Hormuz, the waterway through which a fifth of the world’s oil passes—has triggered a surge in energy markets. U.S. President Donald Trump insists the attacks will soon cease, but he is asking allies for help in securing this strategic Middle Eastern passage, while analysts speculate about how long the oil blockade will last.
Against this turbulent backdrop, the 12 governors of the Federal Reserve’s Federal Open Market Committee (FOMC) will decide on interest rates this Wednesday. It is not a routine meeting. The Fed is expected to update its economic projections at a time of heightened uncertainty. Central bankers must make decisions with the Iran war on the table, but also with an economy showing mixed signals, expectations of rising inflation, and a labor market exhibiting clear signs of weakness.
The key lies in how long the pressure on oil prices will last. Or, to put it another way, how long Tehran can keep the Strait of Hormuz blocked. A quick solution might leave few economic repercussions, but if it drags on for several more weeks, it will cause lasting damage to the economy and open the door to further disruption, forcing central banks to no longer debate whether to cut interest rates further, but whether they need to raise them instead.
Most economists predict the Fed will wait to see how the Iran conflict unfolds before making a decision, and believe it will maintain a cautious stance. “While U.S. inflation remained stable at 2.4% in February, the recent context has been influenced by the energy crisis linked to tensions in the Middle East, which will likely cause a temporary spike in headline inflation in the coming months,” explains Benedicte Kukla, Chief Strategy Officer at the private bank Indosuez Wealth Management. “In the U.S., the transmission of an oil crisis is usually rapid, between one and three months, through gasoline prices, which directly affect household purchasing power and confidence. That said, the impact should be more limited than in Europe due to the lower reliance on natural gas.”
Paolo Zanghieri, senior economist at Generali Investments, points in the same direction: “We expect the Fed to leave official interest rates unchanged at this week’s meeting,” he notes. “It faces the challenge of updating its economic and monetary policy outlook amid great uncertainty, driven by both the war in the Gulf and concerns about the labor market’s reluctance to embrace to artificial intelligence. Given the unpredictable duration of the conflict and its impact on oil prices and inflation, we do not foresee substantial changes to the economic projections,” he adds.
The blockade of the Strait of Hormuz is already having repercussions at U.S. gas pumps. Gasoline prices have been rising daily for two weeks, reaching $3.79 per gallon, a 29% increase in the last month. Fertilizer prices are also rising, and it’s only a matter of time before this spillover effect triggers a spike in food prices. The Fed’s decision coincides with the release of February’s inflation data. The war began on the 28th, so it will have little impact on the data that the Bureau of Labor Statistics will publish this Wednesday.
On the other hand, there are doubts about the health of the labor market. Last February, 92,000 jobs were lost, a figure that dampened analysts’ expectations and raised concerns about the potential impact of AI development on the job market.
Axel Botte, head of market strategy at Ostrum AM, also predicts that the Fed will keep interest rates steady. He explains: “A lot has changed since January. The Iran crisis has driven up oil prices. Employment reports have been disappointing, while inflation triggered by tariffs will turn out to be lower than expected following the Supreme Court ruling. Financial risks related to the performance of private credit markets have intensified.” He goes on to note that in the three months leading up to February 2026, the U.S. economy created an average of 6,000 jobs per month. “This data confirmed that the labor market has been stagnant since last spring and the Liberation Day tariff increases,” he says.
Beyond the economic fallout from the Iran war, the Fed remains concerned about the White House’s attacks on its independence and Trump’s harassment of Powell. Although a judge has rejected the Department of Justice’s attempts to investigate Powell on criminal grounds, the U.S. president has hinted that he will appeal the decision.
The Trump administration’s attitude threatens to slow the confirmation of a replacement for Jerome Powell, whose term ends in May. The U.S. president has tapped Kevin Warsh, a lawyer with experience at the Federal Reserve during Ben Bernanke’s tenure and strong connections on Wall Street. But a group of Senate Republicans, led by Thom Tillis of North Carolina, has warned the federal government that they will not approve any nomination in Congress while the investigation into Powell remains open.
Senator Tillis of North Carolina made his position on the case clear: “This ruling confirms just how weak and frivolous the criminal investigation of Chairman Powell is and it is nothing more than a failed attack on Fed independence,” he said in a statement. “We all know how this is going to end and the D.C. U.S. Attorney’s Office should save itself further embarrassment and move on. Appealing the ruling will only delay the confirmation of Kevin Warsh as the next Fed Chair.”
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