Former US Treasury Secretary Janet Yellen warned this week that the escalating conflict between the United States and Iran could complicate the Federal Reserve’s efforts to cut interest rates in 2026, as geopolitical risk feeds into energy markets and inflation expectations.
According to Bloomberg, Yellen said the trajectory of oil prices and the overall outlook for inflation “depends on how long the Iran conflict affects the oil market,” a subtle but clear signal that monetary easing could be delayed.
The caution comes as markets reevaluate their bets on a rate cut ahead of the Fed’s March meeting.
Fed rate cut seems unlikely
FedWatch data from CME Group shows that traders now assign about a 97.4% probability that the Federal Reserve will keep rates unchanged (350 to 375 basis points) on March 18, with only a small probability (about 2.6%) of a cut before the end of the month.
The chart shows how far markets have moved from previous expectations of near-term easing.
Forecast market traders are echoing traditional rate expectations ahead of the Federal Reserve’s March meeting. On Polymarket, about 97% of participants are betting that the Fed will leave rates unchanged, according to a contract titled “Fed Decision in March.”
Geopolitical tensions in the Middle East have pushed crude oil prices higher, adding an inflationary “risk premium” that could keep Consumer Price Index (CPI) figures high in the coming months.
Higher energy prices typically pass through to major components of inflation such as transportation, housing and manufactured goods, reducing the Fed’s room to ease policy. Global stock and bond markets have already felt the pressure: Asian stocks have fallen, oil and safe-haven U.S. Treasury assets have rebounded and volatility has soared, reflecting increased risk aversion.
Yellen’s remarks echo broader concerns among central bankers that persistent or renewed inflationary pressures, particularly from supply-side shocks like energy, make short-term rate cuts less likely.
Even if domestic inflation returns to trend levels, the lagged effect of oil shocks could change the Fed’s “data-dependent” calculation. Prolonged conflict in the Middle East amplifies this risk, as analysts continue to weigh growth hurdles against inflationary impulses.
Markets now expect the Fed to remain at status quo through 2026 unless inflation slows significantly, with geopolitical risk increasingly cited as a key factor on policymakers’ minds.