Fed minutes show Iran war left officials weighing both inflation and growth risks

Fed confronted a more complicated war-driven outlook

The minutes from the Federal Reserve’s March meeting show a policymaking committee wrestling with a far messier economic backdrop after the outbreak of war in the Middle East. Officials were no longer dealing with a one-directional policy debate centered only on when to cut rates. Instead, they were forced to weigh two conflicting risks at once: rising inflation from higher energy costs and weaker growth if the conflict dragged on long enough to hit jobs and demand.

That left the Fed in an uncomfortable middle ground. Most policymakers still believed a prolonged war could hurt the labour market and potentially justify lower rates at some point. But a growing number were increasingly focused on the opposite risk — that the inflation fallout could become serious enough to require tighter policy instead.

A larger group wanted the Fed to keep hikes on the table

One of the clearest takeaways from the minutes was that more officials wanted the central bank’s post-meeting statement to reflect a genuinely two-sided policy outlook. In practical terms, that meant acknowledging not only the possibility of future cuts, but also the chance that rate increases might become appropriate if inflation stayed above target.

That is a meaningful shift in tone. The same idea appeared in the January minutes, but the March record showed broader support for it. The change suggests inflation concerns have become more widespread inside the committee, especially as energy prices threaten to feed into a broader price environment that was already proving stubborn.

Inflation remains the deeper source of discomfort

The minutes also showed that the vast majority of officials believe it may take longer than previously hoped to return inflation to the Fed’s 2% target. That concern was amplified by the risk that a prolonged Middle East conflict could keep energy prices elevated and eventually spill over into underlying inflation.

Some policymakers went further, warning that after five years of above-target inflation, longer-term inflation expectations may be becoming more sensitive to energy shocks. That matters because once households and businesses begin to assume higher prices will persist, inflation becomes much harder for a central bank to contain without tighter policy.

Labour market risks are still very real

Even with inflation worries intensifying, most officials did not lose sight of the labour market. The minutes show that the majority still saw downside risks to employment, particularly in an economy already running with weak net job creation.

That is the other side of the Fed’s problem. Higher oil and energy costs can hurt consumers and businesses at a time when hiring already looks fragile. In that scenario, the Fed could end up facing slower growth and softer labour conditions even while inflation remains uncomfortably high.

That is precisely why the committee stayed on the sidelines. The risks are moving in opposite directions, and policymakers are not yet ready to commit to a response.

The Fed is on hold, but not comfortable

At the March meeting, officials left the benchmark federal funds rate unchanged at 3.5% to 3.75%. The decision itself was not the surprise. What mattered was the reasoning behind it.

The minutes make clear that the Fed was not standing still because it felt confident. It was standing still because the range of possible outcomes had widened sharply. A longer war could eventually justify cuts if the labour market weakens enough. But if the main effect is persistent energy inflation, the Fed may instead have to consider whether rates need to stay higher for longer — or even rise again.

The next move is no longer easy to read

That leaves the policy outlook far less straightforward than markets had hoped earlier in the year. The official projections released after the meeting still pointed to one rate cut in 2026, but investors remain skeptical that even that will materialize if inflation stays sticky.

In effect, the Fed is now trapped between two unwelcome possibilities. If the war fades quickly, officials may be able to return to the old disinflation story. If it does not, the next policy debate may center not on how soon cuts begin, but on whether the inflation risk becomes too dangerous to ignore.

The minutes show a central bank that is not panicking, but is clearly becoming more uneasy. The Iran war has not yet changed policy. It has, however, made the Fed’s path forward much harder to map.