Former US Treasury Secretary Janet Yellen warned this week that an escalation in the conflict between the US and Iran could complicate the Federal Reserve’s efforts to cut interest rates in 2026 as geopolitical risks loom over energy markets and inflation expectations.
Conclusion
- Traders have almost no chance of a Fed rate cut at the March meeting this year.
- Rising oil prices due to the Middle East conflict are adding upward pressure to inflation expectations.
- Yellen’s comments reinforce caution and push markets “higher for the long run.”
According to Bloomberg, Yellen said the trajectory of oil prices and the overall inflation outlook “depends on how much the Iran conflict affects the oil market,” a subtle but clear signal that tapering may be delayed.
The warning comes as markets are reassessing their rate cut bets for the Fed’s March meeting.
A Fed rate cut is unlikely
CME Group FedWatch data shows that traders are now assigning about 97.4% probability that the Federal Reserve will keep rates unchanged on March 18 (350-375 bps) and only a small chance (about 2.6%) until the end of the month.
The chart shows how markets have retreated from earlier expectations of near-term easing.
Market forecast traders reiterate traditional rate expectations ahead of the Federal Reserve meeting in March. At Polymarket, about 97% of participants are betting that the Fed will keep rates unchanged in accordance with the contract known as the March Fed Decision.
Geopolitical tensions in the Middle East have pushed up crude oil prices, adding an inflationary “risk premium” that could keep the consumer price index (CPI) higher in the coming months.
Rising energy prices typically filter down to core components of inflation such as transportation, housing and industrial products, narrowing the Fed’s window for easing. Global stock and bond markets have already felt the strain: Asian stocks fell, U.S. oil and safe-haven Treasuries rose, and volatility rose, reflecting heightened risk.
Yellen’s comments echoed concerns among central bankers that continued or renewed inflationary pressures, particularly from supply shocks such as energy, make rate cuts less likely in the near term.
Even if domestic inflation returns to trend levels, the delayed impact of oil price shocks could change the Fed’s “data-driven” calculation. The protracted conflict in the Middle East increases this risk as analysts continue to weigh growth headwinds against inflationary impulses.
Markets now expect the Fed to remain on hold until 2026 unless inflation cools materially, with geopolitical risk increasingly cited as a key factor on policymakers’ minds.
