The Federal Reserve’s March meeting minutes landed on Wednesday with a message that had been building for weeks: the central bank was not ruling out rate hikes.
But the minutes were almost old news by the time they hit.
On Tuesday, President Donald Trump announced a two-week ceasefire with Iran — and the very oil shock that had driven the Fed’s hawkish pivot began unwinding in real time.
What the Fed’s March Minutes Said
The March 17–18 minutes showed just how much the Middle East conflict had upended the Fed’s baseline outlook.
Front-month crude oil had surged roughly 50% over the intermeeting period, the one-year inflation swap had risen nearly 50 basis points, and the modal policy path — the most likely outcome implied by options markets — had shifted to no rate cut at all in 2026, up from one cut previously.
The FOMC held the federal funds rate at 3.50–3.75%, as almost all participants favored keeping it on hold. Only one participant — Governor Stephen Miran — dissented, preferring to cut 25 basis points on the grounds that the current stance remained restrictive and was contributing to weak labor demand.
But the minutes made clear that the debate had shifted well past the question of when to cut.
From Rate Cuts to Rate Risks
The vast majority of participants judged that upside risks to inflation and downside risks to employment were both elevated — a simultaneous two-sided threat that central bankers typically find most difficult to navigate.
Although most participants said it was too early to know how developments in the Middle East would affect the U.S. economy, many pointed to the possibility that a sustained rise in oil prices could prompt rate increases to prevent inflation from becoming entrenched.
Some explicitly argued for a two-sided characterization in the post-meeting statement — language that would formally signal that rate hikes are on the table.
“Many participants pointed to the risk of inflation remaining elevated for longer than expected amid a persistent increase in oil prices, which could call for rate increases,” the minutes stated.
The Fed was not just reacting to oil prices. It worried about what persistent oil prices would do to expectations — and whether years of above-target inflation had already made those expectations more fragile.
Core personal consumption expenditure (PCE) inflation — the Fed’s preferred measure, which strips out volatile food and energy — was running at 3.0–3.1% in the January–February timeframe, a full percentage point above the Fed’s 2% target.
The staff’s inflation forecast was revised higher, and the staff noted that risks to inflation were more skewed to the upside than at the January meeting.
Then Came The Ceasefire
Trump announced the two-week ceasefire on Tuesday evening — less than two hours before his 8 p.m. ET deadline to resume strikes on Iranian infrastructure.
Oil’s response was immediate and violent.
West Texas Intermediate (WTI) crude — as tracked by the United States Oil Fund (NYSE:USO) — fell more than 16% to $92 a barrel, on track for its worst daily performance since April 2020. Brent crude dropped nearly 17%.
The stock market soared: the S&P 500 gained roughly 2.56%, while the Nasdaq added 3.46%.
The relief rally was real. But the arithmetic of inflation is still unresolved.
Crude is still roughly $25–30 per barrel above the pre-war level of late February. Gasoline futures remain about 70 cents higher than when the conflict started.
What This Means For The Fed’s Next Move
The March minutes had laid out two opposing scenarios with equal seriousness.
In the first: a prolonged conflict keeps oil elevated, inflation stays sticky, and the Fed is eventually forced to hike.
In the second: labor market softening deepens, demand buckles under the weight of higher energy costs, and the Fed cuts to cushion the slowdown.
Polymarket odds as of Wednesday show a 98% probability of no change at the April 29, 2026 meeting — consistent with the minutes’ near-unanimous hold.
For the full year, prediction markets show a 29.2% probability of zero cuts in 2026, a 26% probability of one cut, and a 20% probability of two cuts.
The ceasefire lowers but does not eliminate the tail risk of rate hikes. Prediction markets still assign a 14% probability to at least one hike before year-end — a number that was rising sharply in the weeks leading up to Tuesday evening prior to the cease-fire announcement.
The Historical Parallel: 1990–1991
August 1990: The Gulf Crisis Shock. Markets believed the Fed would have to hike rates aggressively to combat the oil-driven inflation surge after Iraq’s invasion of Kuwait.
WTI crude doubled in three months, from $17 to $34 a barrel. What proved wrong: the Fed held rates steady and then began cutting in early 1991, as the recession already underway meant demand destruction would do the inflation-fighting work.
The economy contracted, oil reversed sharply once the conflict ended, and the rate hikes that markets priced never materialized.
The rhyme with 2026: the mechanism is the same — energy shock prices in hikes, but if conflict resolution arrives before demand fully collapses, the Fed may find that the oil shock was self-correcting.
The key difference is that inflation is already running at above 3% before the shock, leaving less margin for complacency than in 1990.
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