Oil Surges, Fed Rate Cut Unlikely

The Middle East remains volatile following the US-Israeli strikes on Iran in late February, part of "Operation Epic Fury". Retaliatory missile and drone strikes from Iran have targeted US embassies, military installations, and oil infrastructure across the region. This conflict follows escalating tensions since 2023, including the Gaza war and prior exchanges of strikes between Iran and Israel. The oil price surge is impacting airlines, with some jet fuel prices doubling since the conflict began. Airlines are also facing restricted airspace, causing longer flight times and strained crew resources. Some analysts warn that airlines may be forced to ground aircraft, and weaker carriers could halt operations. Ticket prices are rising sharply. For example, direct flights from Seoul to London on Korean Air Lines jumped from $564 to $4,359 within a week. Some predict oil prices could reach $150 per barrel if the Strait of Hormuz remains disrupted. The Fed held rates steady at 3.50%-3.75% in January, aligning with expectations. Two policymakers dissented, favoring a 0.25% cut. Inflation remains above the Fed's 2% target, influencing the decision to hold. Jerome Powell's term as Fed Chair expires in May 2026, potentially bringing uncertainty to future policy. The market still anticipates possible rate cuts later in the year, dependent on economic data. However, some Fed officials have suggested potential rate hikes if inflation remains high. Factors contributing to potential upside inflation surprises in 2026 include the lagged effects of tariffs, a large fiscal deficit, a tighter labor market due to immigration policy shifts, and looser monetary policy. Conversely, cooling labor markets and the dropping of high months from the previous year's calculation could lower inflation. The conflict increases the risk of terror attacks against US, Israeli, and Western interests, potentially through proxy networks. Governments may increase security around diplomatic missions and public venues.