🥛 What’s next for the Fed as oil surges? 📈

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✍️ Everything you need to know about this week’s Fed meeting.
🎙️ The Milk Road Macro Show: Jordi Visser: The Biggest Market Shift of Our Lifetime Is Starting.
🍪 U.S. PPI (Producer Prices) surged 0.7% MoM in February.

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EVERYTHING YOU NEED TO KNOW ABOUT THIS WEEK’S FED MEETING

It’s Fed week once again.

And it previously looked like Fed Chair Jerome Powell would slide quietly off into the sunset…

His term as Chair is due to end in May.

But any hopes of an uneventful last hurrah have been obliterated.

The Iran war and subsequent surge in energy prices are now a big headache for the Fed.

“Stagflation” is now the new fear.

And it’s a central banker’s worst nightmare.

So, what happened at the meeting?

What did Powell say about the war and oil?

What does the market think about future rate cuts?

And will Powell remain as chair after his term ends?

Let's take a look…

What happened at the meeting?

The Fed made no changes at this week’s meeting - opting to hold rates steady.

This was not unexpected; markets were only pricing a vanishingly slim chance of a rate cut at this week’s meeting.

In the official statement, the unemployment rate was described as “being little changed in recent months” rather than “[having] shown some signs of stabilization” at the last meeting, which suggests less confidence in the labor market having stopped deteriorating.

A new sentence was also added to the statement outlining that “the implications of developments in the Middle East for the U.S. economy are uncertain.”

Source: Federal Reserve

According to Augur Infinity’s LLM-based Fed statement sentiment tracker - this statement was slightly more dovish than the previous meeting in January.

Source: Augur Infinity

We also got an update to the “Dot Plot” (where Fed members forecast what they think will happen with rates in the future).

It remained unchanged from January, signaling one cut this year and one cut next year.

Source: Bloomberg

The dot plot should be taken with a pinch of salt at the best of times, but especially in the current environment with spiking energy prices.

Powell said: “People are writing down something that seems to make sense, but have no conviction.”

He made the point even more directly moments later: “The thing I really want to emphasize is that nobody knows.”

We also got an update to the SEP (Summary of Economic Projections) - where Fed members forecast economic data points.

Overall, 2026 expectations for GDP growth were modestly raised, PCE inflation was raised and the unemployment rate was left unchanged.

Source: Federal Reserve

However, again, this exercise is largely pointless in the current geopolitical environment.

Powell said: "If we were ever going to skip an SEP, this would be a good one because we just don't know."

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EVERYTHING YOU NEED TO KNOW ABOUT THIS WEEK’S FED MEETING (P2)

So, what did Powell say about the war and oil?

The big talking point at the press conference was the Middle East war and the ongoing energy price spike.

Sudden spikes in energy prices are a headache for central bankers - because they are inflationary (which might mean hiking rates in some cases) but could also negatively affect economic growth at the same time (which might mean cutting rates in some cases).

Or, in other words: stagflation (inflation up and growth down).

The Brent crude oil price has shot higher in recent weeks following the start of the war.

According to expert consensus on what different oil prices (if sustained) mean for the global economy, we’re currently in the “stagflation zone”, and rapidly moving towards the “danger zone” ($120+)

Source: TradingView

In the U.S., market-derived inflation expectations have shot higher.

One-year inflation swaps have surged to 3.2%, from 2.2% at the start of 2026.

This means the market currently expects headline U.S. inflation to be 3.2% on average over the next 12 months - much higher than the current 2.4% CPI level.

Source: Augur Infinity

The typical central banker playbook is to not react to an energy shock spike in inflation and to “look through it”.

That was the Fed’s stance in 2003 (Iraq invasion) and the early 1990s (Operation Desert Storm) - both of which led to big energy price spikes.

In both cases, the Fed “looked through” these shocks and continued to cut rates.

At this week’s meeting, Powell repeatedly said “we don’t know” what the effects of the conflict will be.

He said: “The economic effect could be bigger, they could be smaller, they could be much smaller or much bigger. We just don’t know…”

He added: “The net of the oil shock will still be some downward pressure on spending and employment and upward pressure on inflation. I would reserve the term stagflation for a much more serious set of circumstances.”

Powell argued that current conditions do not resemble a true stagflation regime like the 1970s, particularly with unemployment still near longer-run normal levels.

So, what does the market think about future rate cuts?

As energy prices have spiked since the start of the war, interest rate traders had already slashed expectations of rate cuts in 2026 from 2.5 in February to 0.9 before the meeting.

Expectations then declined further to 0.6 cuts after the press conference.

The market is coming around to the prospect of potentially no rate cuts at all this year.

But will Powell remain as chair after his term ends?

Powell also surprised Fed watchers by making some definitive statements about his near-term future at the central bank.

He’s due to leave his role as Chair when his term ends in May, but he doesn’t necessarily have to step down from the board - he could remain as a governor.

And Powell said he had “no intention” of resigning as a member of the board until an ongoing investigation by the Department of Justice into a building renovation project is “well and truly over.”

Powell is accused of misleading Congress and making false statements about a renovation of the Fed’s headquarters.

But even more strikingly, Powell said that if his successor is not confirmed before May, he would serve as “chair pro tempore” (keep serving as the Fed’s acting presiding chair on a temporary basis).

President Trump has nominated Kevin Warsh to become the next Fed Chair, but Warsh has not yet been officially “confirmed” by the Senate.

And some lawmakers have outlined that they won’t confirm Warsh until the DoJ investigation is over…

So if Warsh isn’t confirmed soon, Powell might remain as Fed Chair.

I don’t think Trump will be very happy about that…

Wrapping up

The overall message from the Fed meeting is one of watching and waiting - until there is greater clarity on the macroeconomic backdrop.

Powell repeatedly said “we don’t know” when asked about how the war and energy prices would affect the economy.

But at the same time - oil prices keep on rising…

The market is now much less convinced of a rate cut this year than it was previously - and expectations are sliding towards no cuts at all.

But a rate hike also appears to be off the cards for now.

The Fed likely can't cut into an oil shock, but they also likely won't hike into an economic slowdown.

The word "trapped" comes to mind.

And will we be seeing more of Powell than we previously thought?

Will he be staying on as Chair even after his term ends in May?

There are so many unknowns right now...

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