Amid the Iran war, inflationary pressures, a weak job market and an uncertain outlook for tariff policy, the Federal Reserve is scheduled to meet next week to announce its decision on interest rates.
The federal funds rate, set by the Federal Open Market Committee, is the rate at which banks lend to each other overnight, but it also has a trickle-down effect on borrowing and savings rates for many consumers.
For now, experts believe central bank policy will remain unchanged. Pricing in the futures market suggests there is little chance of a rate cut, according to CME Group’s FedWatch indicators.
“Fed officials will hold back until there is some clarity on how the war with Iran is going to play out and whether the imperatives of low inflation or full employment are most at stake,” said Mark Zandi, chief economist at Moody’s. “It could take weeks, if not two or three months.”
This means there is little recourse for consumers who are in the crosshairs. “If you were hoping the Fed would jump right in and bail you out, you’re going to be disappointed,” said Matt Schultz, chief credit analyst at LendingTree.
Meanwhile, Brett House, an economics professor at Columbia Business School, said, “The attack on Iran has made life more expensive and more precarious for American families.” “Oil and gasoline prices are skyrocketing, and the yield on the 10-year Treasury note, the benchmark for mortgage rates, is also rising.”
The Consumer Price Index (CPI), a key measure of inflation, rose 2.4% in February from a year earlier, according to the latest figures from the Bureau of Labor Statistics. But that was before the Iran war, which caused energy prices to soar and fuel long-term inflation concerns.
Economists say higher oil prices could complicate the inflation picture in coming months as they are reflected in airfares, transportation and other costs.
On Thursday, Brent crude oil futures briefly reached $100 a barrel again, and the national average gasoline price rose to $3.59 a gallon, up 22% from a month earlier, according to AAA.
Inflationary pressures after joint US-Israel strike also pushed benchmark yields higher 10 year treasury — Mortgage interest rate barometer — up to 4.173%.
“Nothing in this war will make life more affordable for the average American,” House said.
“Rocket and Feather” effect
Even if the war ends “soon,” as President Donald Trump has said, and the surge proves short-lived, the decline in gasoline prices could become even more gradual as oil prices fall.
Economists are calling this the “rocket-and-feather” effect, according to a Wednesday research note by Soong Won Son, professor of financial economics at Loyola Marymount University and chief economist at SS Economics. “Gasoline prices go up like a rocket, but they come down like a feather,” he wrote.
Because fuel distributors buy gas from refineries and store it before selling it to consumers, they may be unloading inventory they bought at high prices even after crude supplies stabilize. “Prices at the pump tend to fall gradually, rather than immediately, until inventories are replaced with cheaper fuel,” Song wrote.
Even before the escalation of the U.S. war in the Middle East raised concerns about inflation, rising costs of living and a weakening labor market were creating tight housing prices for many American households.
The U.S. economy lost jobs in February, with the unemployment rate rising to 4.4%, the U.S. Bureau of Labor Statistics said Friday.
“The Federal Reserve and Treasury are likely considering options to ease the burden on household budgets, but there are limited tools available,” said Stephen Cates, a certified financial planner and financial analyst at Bankrate.
“The Federal Reserve’s mission is becoming more complex,” Cates said. “Despite some signs of weakness in the labor market in February, concerns about accelerating inflation will likely keep the Fed from cutting rates at its next two meetings.”
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