Partner, Portfolio Manager
At the conclusion of Wednesday’s Federal Open Market Committee (FOMC) meeting, the Federal Reserve voted 11-1 to hold rates steady at 3.50-3.75%. This is the Fed’s second consecutive pause, and it signals a potentially longer “wait and see” period before the next change to interest rate policy. Governor Stephen Miran was the lone dissenter, voting in favor of a 25 basis point cut.
The outcome signals a reluctance from the FOMC to prematurely ease rates, especially in the face of a more muddled outlook on inflation expectations.
Inflation Data Ticks Up—And The Iran Conflict Won’t Help
Future Fed decision-making wasn’t helped by the latest inflation data released Wednesday morning, hours before the Fed’s March rate announcement. The February Producer Price Index (PPI) report indicated wholesale inflation was starting to reaccelerate. Headline PPI rose 0.7% month-over-month and 3.4% year-over-year—both exceeding expectations.As a measure of input costs faced by producers, PPI can serve as a leading indicator for future consumer price pressures, suggesting that the path back to the Fed’s inflation target may be less linear than previously anticipated.
Importantly, the data was collected prior to the onset of the Iran conflict in late February, meaning any inflationary effects tied to geopolitical developments have yet to be captured in the data.
In his post-meeting press conference, Chair Jerome Powell acknowledged the heightened uncertainty stemming from geopolitical risks, emphasizing the wide range of possible economic outcomes.
“The thing I really want to emphasize is that nobody knows,” he said, adding that the inflationary impact of the conflict could vary significantly in either direction. This uncertainty further complicates the Fed’s already delicate balancing act between maintaining price stability and supporting economic growth.
Market expectations concerning rate cuts have shifted materially over the last several weeks. Entering March, fed funds futures markets were pricing in as many as three rate cuts in 2026. As of Thursday, that outlook has been repriced dramatically—markets anticipate no cuts in 2026. As of Friday morning, markets are now pricing in a potential rate hike as early as October of this year.
This sharp pivot underscores how quickly sentiment can adjust when inflation data surprises to the upside and geopolitical risks introduce additional uncertainty to the macroeconomic landscape.
What Does This Mean For Investors?
First, geopolitical uncertainty is impacting both the financial markets and the broader global economy. The longer the Iranian conflict persists, the longer the markets will have to grapple with the threat of higher prices across a wide range of industries and goods.Second, higher prices combined with heightened geopolitical uncertainty makes the Fed’s job increasingly more difficult. Coming into this year, it was widely assumed that the Fed would be cutting rates multiple times because it appeared that the job market was slowly softening and inflation was contained.
Those assumptions have completely shifted, with the market now assuming the Fed will be in a prolonged “wait and see” period. For investors, this means less policy support in the near term and a continued reliance upon incoming data rather than forward guidance.
Third, the implication is a higher-for-longer rate environment across the yield curve. A steady Fed policy rate will continue to anchor yields at the front end of the curve, while renewed inflationary pressures are likely to push longer-term yields higher. This dynamic could result in a steeper yield curve over time, driven not by easing expectations but by rising term premiums.
Final Thoughts
As we stated in last week’s Insights, we don’t profess to have a crystal ball when it comes to geopolitical uncertainty. The current macro environment remains fluid and requires constant monitoring, particularly as circumstances continue to evolve and influence both inflation expectations and market sentiment.We would emphasize that we are not attempting to “trade through” shorter-term periods of volatility. History and experience tell us that is a fool’s errand. Instead, our approach remains grounded in discipline and guided by a long-term perspective, focusing on prudent risk management, diversification, and alignment to our client’s broader investment goals.
Join Us On Substack
Substack is our new hub for Investment Insights where you can easily read previous editions, all in one place.If you are familiar with Substack and prefer to receive in-app mobile notifications and emails when the latest edition is published, please “Subscribe” here.
If you enjoy reading Insights on a computer or tablet, we recommend bookmarking our Substack website for an easier, more convenient experience. No more email searching required. All editions are available on the website.
We’re here to help with any questions you may have!
