The Feds Strategic Outlook: Managing Policy in an Evolving Global Landscape

“Don’t fight the Fed.” A popular cliché describing the importance of monetary policy’s effects on the financial markets. The Federal Reserve (Fed) meets 10 times a year, with market participants nervously biting their fingernails, waiting for the latest interest rate announcement. The most recent Fed meeting announced holding rates steady, allowing for a sign of relief.

Last week’s Fed meeting came at an interesting time. Prior to the Iran conflict/attack/war/aggression (we’re still not sure how to categorize it), economic forces pointed towards an advancing economy with moderating inflation (though still above target). Prior to the Iran conflict, the Fed was moving to a more “neutral interest rate” stance, meaning more rate cuts ahead. The Fed still considers interest rates are curbing economic activity. Prior to the Iran conflict, we estimated two more cuts totaling 0.50%.

The recent geopolitical events threw a wrench in the works. There were many calls for a slowing economy and (much) higher inflation. The economic data has demonstrated that neither has transpired yet. So far, consumers and businesses are carrying on with little regard to international happenings. In fact, early GDP numbers suggest the first quarter’s economic activity accelerated from the fourth quarter of 2025. At this point, this is likely a question of duration. The longer the conflict continues, the more impactful it will be on wallets.

Beyond the normal economic fundamentals, the Fed also needs to consider longer-term impacts of exogenous shocks. This is a very tricky endeavor as kinetic conflicts have a very wide range of potential outcomes and durations. So far, Middle East neighbors not involved with the initial attacks have shown great restraint after Iranian counterstrikes, giving good reason to believe the conflict will remain very localized. The duration, on the other hand, is the sticky wicket. If kept as a short-term event, energy prices are likely to return to pre-conflict levels with little consumer or business pricing pressure. If this turns out to be a long-term affair, higher energy prices will ultimately make their way into consumers’ pockets, directly via higher gas prices or indirectly via businesses passing on higher costs. Recall, energy is foundational to ALL goods and services.

With all this said, the Fed is stuck between a rock and a hard place. Cutting rates towards a “neutral rate” would accelerate the economy yet could induce inflationary pressure. Recall, inflation, though controlled and manageable, is above the 2% target. Raising rates may slow the economy with the hope of further downward pressure on inflation. Yet, raising rates while the conflict moves into a long-term affair could easily have the opposite effect of increasing inflation while slowing the economy, a.k.a. stagflation… a very undesirable economic predicament. During last week’s meeting, the Fed ultimately decided to leave the status quo and let the incoming Fed Chairman, Kevin Warsh, deal with the next steps. Oh, did we mention a new Fed Chairman is coming in?!? Another variable to consider. It’s never a dull moment in the financial markets.