Fed: Stagflation dilemma in Iran War – DBS

DBS Group economist Philip Wee argues that the Fed enters its March 17–18 FOMC meeting caught between surging energy-driven inflation and weakening US growth. With GDP revised down and the Sahm Rule triggered, recession is now a baseline concern. The Fed must judge whether oil spikes demand higher rates or act as a tax justifying cuts, shaping Dollar dynamics.

FOMC weighs inflation against recession risk

"The FOMC enters its March 17-18 meeting trapped in a stagflation pincer. Fed Chair Jerome Powell may still be haunted by the "behind the curve" spectre of 2022, when a delayed response to surging prices forced a painful, aggressive hiking cycle. "

"Hence, he is loath to pivot too early and risk a second wave of inflation, especially as the Iran War and the closure of the Strait of Hormuz have catapulted global crude oil prices."

"However, today’s Fed confronts a fragile US economy where 4Q25 GDP was revised down to 0.7% QoQ saar from 1.4% initially. February’s non-farm payrolls saw a shock contraction of 92,000 jobs vs. the expected 59k gain. With the unemployment rate hitting 4.4% and triggering the Sahm Rule, recession is no longer a tail risk but a baseline concern."

"While higher oil prices push headline inflation up, the accompanying supply disruptions and drained disposable income act as powerful drags on household spending and the corporations’ investment and hiring plans."

"The FOMC must determine whether these energy price spikes represent a primary inflationary threat requiring higher rates or a consumer tax necessitating cuts."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)