Fed "On Hold" Amid Geopolitical Risk
Treasury Secretary Yellen says the ongoing Iran conflict is making the Fed "even more on hold" regarding rate changes. Following a surprise jump in producer prices, traders have recalibrated expectations to just two rate cuts this year, down from three. The central bank is also scheduled to inject $8.01 billion into the economy tomorrow as part of its QE program.
The recent Producer Price Index (PPI) report for January showed a 0.5% monthly increase, surpassing forecasts of 0.3%. On an annual basis, producer prices rose 2.9%, also higher than the 2.6% that was anticipated. Driving the wholesale inflation was a 0.8% jump in the cost of services, the largest increase since July of last year. Core PPI, which strips out volatile food and energy categories, surged 0.8% for the month, significantly above the 0.3% consensus expectation. The conflict in Iran introduces significant volatility, primarily through energy markets. A major escalation could disrupt the Strait of Hormuz, a critical channel for global oil supply, potentially impacting a third of the world's oil output and putting upward pressure on inflation. The Federal Reserve's current benchmark interest rate sits in a target range of 3.5% to 3.75%. This follows three consecutive quarter-point rate cuts in late 2025, which were aimed at countering signs of a cooling labor market at the time. The announced quantitative easing (QE) injection marks a continued reversal from the policy of "quantitative tightening" that began in March 2022. That tightening period saw the Fed's balance sheet shrink by over $2.2 trillion before the policy shifted back to asset purchases in December 2025. While traders have lowered their expectations, some economists still forecast up to three rate cuts in 2026. However, others, like those at J.P. Morgan Global Research, anticipate that the central bank will keep rates on hold for the remainder of the year.
