Powell signals Fed will take cautious approach to interest rates amid Middle East tensions

FEDERAL Reserve Chair Jerome Powell said Monday that U.S. monetary policy remains on stable ground, but the central bank will adopt a ‘wait-and-see’ stance regarding interest rate adjustments as the economic impact of the ongoing Middle East conflict unfolds, according to Oilprice.com

Powell emphasised that it is “too early to determine” the full extent and duration of the war’s economic consequences. He noted that geopolitical risks make the economic outlook uncertain. The Fed chair added that while energy price shocks can be sharp, they are usually temporary. Acting too quickly to raise rates in response to spiking oil costs could backfire once those shocks fade. During its March 18 meeting, the Federal Reserve opted to keep interest rates steady at 3.50 percent -3.75 percent.

The conflict has driven gasoline and fuel prices higher, with the national average for a gallon of gas climbing to $3.990 from $2.982 a month ago, adding to inflationary pressures.

In response, the Trump administration has sought to reassure markets. Treasury Secretary Scott Bessent told Fox News that global oil supplies remain sufficient and pledged that the U.S. would ensure free navigation through strategic waterways, either unilaterally or with multinational support.

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Despite these assurances, market participants remain cautious. Money markets currently assign a 42%-52% probability of a rate hike, while the likelihood of a rate cut in 2026 stands at just 8%, a sharp turnaround from prior expectations of multiple reductions. Rising energy costs are pushing up transportation and production expenses, intensifying headline inflation and challenging the Fed’s 2% target. Persistently high oil prices could also slow economic growth, creating a stagflation-like scenario that limits the central bank’s flexibility.

Analysts expect oil prices to stay elevated, potentially into 2027, as Middle East geopolitical tensions persist and supply alternatives remain constrained. Goldman Sachs has warned that structural supply shortages may emerge, projecting that prices could spike to $150-$200 per barrel if the Strait of Hormuz remains closed.