Fed: DBS analyzes stagflation risks amid Iran conflict

Fed Faces Dilemma: Balancing Inflation Pressures and Economic Slowdown

According to DBS Group economist Philip Wee, the Federal Reserve approaches its March 17–18 FOMC meeting at a crossroads, grappling with rising inflation fueled by energy costs and signs of a slowing US economy. With GDP growth estimates revised downward and the Sahm Rule now activated, concerns about a recession have become central. The Fed must decide whether surging oil prices call for higher interest rates or if they function as a financial burden on consumers, potentially justifying rate cuts—decisions that will influence the US Dollar’s trajectory.

FOMC Confronts Stagflation Risks

The upcoming FOMC meeting finds policymakers caught in a challenging environment reminiscent of stagflation. Chair Jerome Powell remains wary of repeating the mistakes of 2022, when a delayed response to inflation led to a rapid and painful tightening cycle.

Powell is therefore hesitant to shift policy direction prematurely, fearing a resurgence of inflation, especially as geopolitical tensions—such as the conflict involving Iran and the closure of the Strait of Hormuz—have sent global oil prices soaring.

Meanwhile, the US economy shows signs of vulnerability. Fourth-quarter 2025 GDP growth was downgraded to just 0.7% quarter-on-quarter annualized, down from the initial 1.4%. February’s non-farm payrolls unexpectedly shrank by 92,000 jobs, defying forecasts of a 59,000 increase. With unemployment now at 4.4% and the Sahm Rule triggered, recession fears have moved to the forefront.

Although higher oil prices are pushing inflation higher, the resulting supply chain disruptions and reduced disposable income are weighing heavily on consumer spending and discouraging business investment and hiring.

The FOMC faces a critical decision: should it treat the spike in energy prices as a major inflation threat that requires tighter policy, or as an economic burden on households that warrants easing?

(This report was produced with assistance from an AI tool and subsequently reviewed by an editor.)