Fed Rate Cut Expectations Evaporate Amid Oil Crisis

Rates Steady, Outlook Less Certain

The Federal Reserve delivered a measured message to financial markets at its March policy meeting, choosing to leave interest rates unchanged while signalling that the path toward monetary easing is becoming increasingly uncertain. Policymakers kept the benchmark federal funds rate in the 3.50% to 3.75% range, reinforcing the view that the central bank is entering a more complex phase of the cycle defined by persistent inflation risks and moderating growth. ¹

Rising Crude Prices Delays Rate-Cuts

The decision comes at a time of heightened geopolitical tension and rising energy prices, developments that are complicating the inflation outlook. Federal Reserve Chair Jerome Powell acknowledged that the recent oil shock linked to the conflict involving Iran is adding a new layer of uncertainty to the economic trajectory. While inflation had shown signs of stabilising earlier in the year, the surge in crude prices is expected to push price pressures higher again in the near term, making it more difficult for policymakers to justify cutting rates too quickly. ¹

Dot Plot Signals Softer Rate-Cut Confidence

The Federal Open Market Committee’s updated Summary of Economic Projections, commonly referred to as the dot plot, reflected this change in tone. Officials continue to anticipate at least one interest rate cut this year, but confidence around the timing has weakened. At the same time, projections for core inflation were revised higher for both this year and next, partly due to the expected pass-through from elevated energy costs. Policymakers still expect inflation to fall more decisively by 2027, suggesting that the current shock is viewed as potentially temporary, although far from certain. Growth forecasts for the outer years were modestly upgraded, pointing to underlying resilience in the medium-term outlook. ²

Oil Shock Revives Stagflation Fears

The policy dilemma facing the central bank is becoming evident. Higher oil prices, driven in part by supply disruptions around the Strait of Hormuz, risk reigniting inflation expectations at a time when economic momentum is beginning to soften. The situation resembles an early-stage stagflationary shock, where slower growth coincides with rising prices. Powell was careful to stress that the U.S. economy remains far from the severe stagflation episodes of the 1970s, but he acknowledged that the direction of travel is uncomfortable for policymakers tasked with balancing price stability and employment.

Source: TradingView. S&P 500 daily price chart as of 20 March 2026.

Higher-for-Longer Hits Equities

Financial markets reacted negatively to the Fed’s cautious stance. The benchmark S&P 500 fell following the announcement as investors reassessed the likelihood of near-term rate cuts. The higher-for-longer interest-rate environment is firmly back in focus. Even without further tightening, the delay in policy easing keeps discount rates elevated, puts pressure on equity risk premiums and leaves valuations, particularly in long-duration growth sectors, more vulnerable to macro shocks.

The S&P 500 has declined by nearly 4% since the start of the conflict in Iran, with markets largely overlooking the potential negative implications of higher oil prices for equities. With no near-term interest rate cuts in sight and signs that the conflict is escalating and broadening, the likelihood of oil prices remaining elevated for longer is increasing. In this environment, we see a strong probability that the key support level for the S&P 500 at 6,521 could be broken in the coming sessions. Such a move would confirm that the secondary uptrend has ended and could trigger a decline toward 6,150 in the months ahead.

Rising Yields Challenge Equity Appeal

Energy markets are likely to determine equity performance in the coming months. A prolonged conflict could lead to a meaningful repricing of global equities, with downside scenarios suggesting significant declines if supply disruptions persist. Historically, sustained oil shocks have compressed corporate margins, weakened consumption and tightened financial conditions, creating a challenging backdrop for stocks.

At the same time, the rise in the U.S. 10-year Treasury yield toward the 4.2% level signals tightening financial conditions across the real economy. Higher borrowing costs are feeding through to mortgage rates, corporate financing and overall investment activity. This reduces the relative attractiveness of equities compared with fixed income and increases refinancing risks for more leveraged companies.

Equity Direction Hinges on Oil and Rates

The rapidly deteriorating geo-political situation in the Middle East could change market leadership. Companies with strong balance sheets, pricing power and stable earnings visibility are likely to be favoured, while more speculative and rate-sensitive segments could face continued volatility. Traditional defensive sectors are not outperforming yet, suggesting that markets are not yet in a full risk-off environment.

Unlike the post-global financial crisis era, when central banks could move quickly to support growth at the first sign of weakness, persistent inflation is now limiting policy flexibility. Powell emphasised that future decisions would remain data-dependent and that officials will need to assess how long geopolitical risks and energy-market disruptions continue to influence inflation.

In this environment, equity markets are likely to be driven by macro volatility, oil-prices and expectations around the timing and scale of eventual rate cuts.

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Footnotes:

1. CNBC: Traders now see little chance of an interest rate cut this year following Fed decision, as of 19 March 2026.
2. CNBC: Fed still expects to cut rates once this year despite spiking oil prices, as of 18 March 2026.