U.S. Federal Reserve policymakers are meeting for the first time since the U.S. and Israel launched airstrikes on Iran nearly two weeks ago, fueling higher oil prices that have rallied across assets.
Fed members will grapple with questions about the impact of the energy shock on inflation and economic growth at its two-day meeting. The central bank will publish economic forecasts on Wednesday. Markets are now pricing in feverish hopes for a rate cut in the wake of the conflict, even as expected cuts have been a key source of optimism for stock investors this year.
“The Fed will be front and center, especially given the fact that we’ve seen the market pull back … these rate cut expectations,” said Angelo Korkafas, global investment strategist at Edward Jones.
US stock indexes have fallen and equity volatility has risen since the start of the Iran war. Investors have been bracing for big moves in oil prices, with US crude nearing $120 a barrel earlier in the week, and recent trades seen near $100. Iran said the world should be ready for oil to hit $200 as its forces targeted merchant ships during the week. The benchmark S&P 500 was down more than 4% on Thursday from its record high close since late January, on course for a third straight weekly decline.
“We are seeing wild swings in the market as traders react to any indication of developments, positive or negative, positive or negative in the Iran conflict,” said Sid Vaidya, investment strategist at TD Wealth.
Is the nutrition preserved for a long time?
The Fed is widely expected to keep interest rates steady for a second straight session when it issues its policy statement on Wednesday. The central bank cut rates last year to ease the labor market, but ended its easing cycle in January as employment and inflation risks eased.
Investors expect more price cuts this year, which is expected to support prices for stocks and other assets. Those expectations have been dialed back due to fears that rising energy prices will fuel inflation.
“We believe this will only keep the Fed on hold for a long time,” Vaidya said. Meanwhile, a surprisingly weak jobs report for February could encourage the Fed to maintain an easing bias.
Fed funds futures on Thursday were priced up about a standard quarter of a percentage point in December, down from two similar declines in late February before the war broke out, according to LSEG data.
FED PROJECTIONS, POWELL COMMENTS IN FOCUS
As part of this meeting, the Fed will release updated estimates from policymakers on rates, as well as their future expectations for inflation and the labor market. Fed Chairman Jerome Powell’s press conference on Wednesday, following the central bank’s policy statement, could also shed light on how Fed members view the impact of the dispute.
“I think this will set the table for the year and how we look at inflation driven by oil prices,” said Paul Nolte, market strategist and senior wealth adviser at Murphy & Sylvester Wealth Management.
For Paul, this will be his second and final meeting before his term as chairman ends in May. The next rate move may not come until President Donald Trump’s nominee for Fed chairman, former Fed Governor Kevin Warsh, is expected to take over the central bank’s helm.
Next week, Nvidia’s annual developer conference could also bring renewed focus to the artificial-intelligence business, which has created volatility for the technology and other stocks at the start of the year.
But investors expect Iran-related news to remain important.
“Headlines continue to drive market movements as investors await more clarity on the timing of the U.S. exit strategy.” LPL Financial chief technical strategist Adam Turnquist said in a written comment on Thursday.
