The Fed's Impossible Choice: Why Economists Still Bet on a June Rate Cut Even as War Sends Oil Past $100

The Federal Reserve faces its most treacherous policy crossroads since the pandemic era. With crude oil surging past $100 a barrel for the first time since 2022, a war engulfing the Persian Gulf, and the biggest leadership transition at the central bank in nearly a decade, most economists still expect the Fed to cut interest rates in June. The question tearing Wall Street apart is whether they're right — or dangerously wrong.

The Baseline: Where Things Stand

The Federal Open Market Committee held the federal funds rate at 3.50–3.75% at its January 28 meeting, the second consecutive pause after a series of cuts that began in September 2024 brought the rate down from a cycle peak of 5.33% [1]. The decision was unanimous and widely expected. Chair Jerome Powell, presiding over what may be among his last meetings before his term expires on May 15, signaled patience [2].

The February Consumer Price Index, released on March 11, showed inflation running at 2.4% year-over-year, unchanged from January and in line with expectations [3]. Core CPI — stripping out food and energy — registered 2.5% annually. Both readings remain above the Fed's 2% target, but neither suggested an economy spiraling out of control.

Then the bombs fell.

Source: FRED / Federal Reserve

Data as of Mar 13, 2026CSV

The Iran Shock

On February 28, the United States and Israel launched joint military strikes against Iran. The consequences for energy markets have been swift and severe. Oil prices, which had been trading around $65 a barrel in late February, rocketed past $100 within days [4]. Shipping through the Strait of Hormuz — the narrow waterway through which roughly 20% of the world's oil supply passes — plunged by 95% in the first week of March [5]. By March 10, Gulf production cuts amounted to at least 10 million barrels per day, making this the largest disruption to the global energy supply since the 1970s oil crises [6].

Brent crude briefly touched $120 per barrel before settling back, while WTI crossed $101 [7]. American consumers are already feeling the pinch: average U.S. gasoline prices climbed from roughly $3.00 per gallon before the strikes to $3.45 by mid-March [8]. Some analysts warn that if Strait of Hormuz traffic doesn't resume, crude could reach $150 per barrel by month's end [4].

The conflict's economic footprint extends far beyond the gas pump. Roughly one-third of global fertilizer trade transits the Strait of Hormuz, and petrochemical inputs — plastics, rubber, pharmaceuticals — are all facing supply chain stress [6]. Goldman Sachs raised its 2026 U.S. inflation forecast by 0.8 percentage points to 2.9% and trimmed its GDP growth projection by 0.3 points to 2.2% [9].

Source: FRED / U.S. Energy Information Administration

Data as of Mar 13, 2026CSV

The Reuters Poll: Economists Hold the Line

Despite the energy shock, a Reuters poll conducted March 6–12 found that a majority of economists still expect the Fed to deliver its first rate cut of 2026 at the June 17–18 FOMC meeting [1]. Nearly 60% forecast the federal funds rate will fall to a 3.25–3.50% range by end of the second quarter.

The reasoning rests on several pillars. First, the labor market is softening. February's jobs report showed 92,000 positions lost — a sharp reversal after months of moderate gains — while weekly jobless claims ticked up to 222,000 [10]. The unemployment rate stands at 4.4%, up from 4.0% in January 2025 [11]. The Job Openings and Labor Turnover Survey (JOLTS) has continued to slide, suggesting a labor market that is, as the St. Louis Fed put it, "no longer just cooling, but potentially shivering" [10].

Second, the tariff drag is already baked in. Trump-era tariffs — the largest U.S. tax increase as a share of GDP since 1993, costing the average household an estimated $1,500 in 2026 — are projected to shave 0.62 percentage points off growth this year [12]. A rate cut could offset some of this fiscal headwind without fundamentally changing the inflation picture, the argument goes.

Third, there is a view among many forecasters that the oil shock will prove transitory. Historical precedent suggests that Middle Eastern conflicts, while disruptive in the short term, tend to produce price spikes that fade as supply adjusts and strategic reserves are tapped [8]. The Biden administration and now the Trump administration have both drawn down the Strategic Petroleum Reserve in previous crises.

Wall Street: A House Divided

The consensus among economists masks a deep split among the major Wall Street banks — one of the widest divergences in years.

Goldman Sachs initially expected two 25-basis-point cuts in June and September, bringing the fed funds rate to 3.00–3.25% by year-end. In the wake of the Iran conflict, however, Goldman became the first major brokerage to push its first-cut call from June to September, citing renewed inflation risks from higher energy prices [13]. Goldman has also raised its recession probability to 25% [9].

Morgan Stanley and Barclays maintain their June cut calls, viewing the labor market deterioration as the more pressing risk to the economy [14].

J.P. Morgan stands alone as the most hawkish of the major banks, predicting no rate cuts at all in 2026. The bank's economists forecast that the fed funds rate will hold at 3.50–3.75% through the end of the year, with the next move being a 25-basis-point hike in the third quarter of 2027 [15]. Their reasoning: the inflationary impulse from both tariffs and the energy shock will prove more persistent than the market expects.

The CME FedWatch tool, which prices rate-move probabilities from federal funds futures, shows approximately 48% odds of a June cut — essentially a coin flip [16]. Interest rate futures pricing has shifted to September for the most likely timing of the year's first reduction.

Source: FRED / Bureau of Labor Statistics

Data as of Mar 13, 2026CSV

The Dual Mandate in Conflict

The philosophical tension at the heart of the debate is the Fed's dual mandate: maximum employment and stable prices. For the first time since the 1970s, both goals appear to be under simultaneous threat.

San Francisco Fed President Mary Daly recently noted that "both sides of the central bank's dual mandate are now at risk" [10]. The St. Louis Fed published an analysis in March titled "The Dual Mandate in Conflict," warning that the current environment bears uncomfortable similarities to the stagflationary episodes of the 1970s, when the Fed faced the impossible task of fighting inflation while the economy was already contracting [17].

The danger of cutting too soon is that it could "de-anchor inflation expectations" — the central bank term for the moment when businesses and consumers lose faith that the Fed will actually bring prices down to 2%, and begin setting prices and wages accordingly [10]. Once expectations become unmoored, history suggests that taming them requires far more aggressive tightening, and far greater economic pain, than preemptive patience would have demanded.

The danger of cutting too late is that the labor market deterioration, compounded by tariff-driven costs and an energy shock, tips the economy into recession. With unemployment already at 4.4% and climbing, job losses accelerating, and consumer confidence shaken, waiting too long risks the kind of hard landing that the Fed spent 2023–2025 carefully trying to avoid.

The Leadership Question

Layered onto this policy dilemma is an institutional one. Powell's term as chair expires May 15. President Trump formally nominated Kevin Warsh to succeed him on January 30, and transmitted the nomination to the Senate in early March [18]. Warsh, a former Fed governor and Morgan Stanley banker who served on the Board during the 2008 financial crisis, is widely described as an "inflation hawk" [19].

But his path to confirmation has hit a snag. Senator Thom Tillis, a North Carolina Republican, has blocked a vote on the nomination, saying he won't support any Fed nominee until a criminal investigation into Powell is resolved [20]. If all Senate Democrats also oppose Warsh, the nomination could stall in committee entirely.

The uncertainty introduces a wild card. If Warsh is confirmed and seated before the June meeting, his hawkish instincts could shift the FOMC's center of gravity against a cut. If the confirmation drags past June, Powell — or an acting chair — may preside over the decision, with different institutional incentives and a different risk calculus.

The February Reuters poll found that economists who factored in the Warsh transition generally expected rates to remain on hold longer, while those who assumed continuity were more bullish on June easing [1].

The Numbers Behind the Debate

The economic data present a mixed and increasingly volatile picture:

• Inflation: CPI at 2.4% (February), but the oil shock has yet to flow through to consumer prices. Goldman projects inflation reaching 2.9% by mid-year [3][9].
• Employment: Unemployment at 4.4%, with 92,000 jobs lost in February. Weekly claims at 222,000 [10][11].
• Oil: WTI crude at $94.65 as of March 9, up from $57 at the start of the year — a 66% surge. Brent has traded as high as $120 [4][7].
• Growth: GDP growth expected at 2.2% in 2026, down from earlier estimates of 2.5%, with tariff drag accounting for much of the downgrade [9][12].
• 10-Year Treasury yield: 4.21% as of March 11, climbing from 3.97% on February 27 as inflation fears reassert themselves.

Source: FRED / U.S. Treasury

Data as of Mar 13, 2026CSV

What Comes Next

The FOMC meets March 17–18, and the market universally expects a hold [2]. The more consequential meetings are May 5–6 — which would be among Powell's last — and June 17–18, the most-discussed date for a potential cut.

Between now and June, the Fed will receive two more CPI reports, two more jobs reports, and — crucially — a much clearer picture of whether the Iran conflict represents a temporary supply disruption or a structural shift in global energy markets. If Strait of Hormuz traffic resumes and oil falls back toward $80, the case for a June cut strengthens considerably. If the strait remains effectively closed and crude pushes toward $150, even the most dovish forecasters will have to reassess.

The broader context matters too. Tariffs continue to exert upward pressure on consumer prices, with the full effect of 2025 increases still working through supply chains [12]. The housing market remains strained, with mortgage rates hovering above 6%. And the political environment — with a presidential administration that has openly called for lower rates while simultaneously pursuing trade policies that push prices higher — adds another layer of complexity to the Fed's deliberations.

Mark Zandi, chief economist at Moody's Analytics, had predicted before the Iran conflict that the Fed would surprise with three rate cuts in the first half of 2026 [21]. That forecast now looks aggressively optimistic. But Zandi's underlying logic — that the labor market is weakening faster than the headline numbers suggest, and that the Fed risks being behind the curve on employment — resonates with a significant faction of economists.

The Fed's choice this summer will be a test of institutional nerve. Cut rates into an oil-driven inflation surge and risk repeating the mistakes of the 1970s. Hold steady and risk a recession that could deepen into something far worse. The majority of economists, for now, are betting that the central bank will choose to cut — cautiously, grudgingly, and with a healthy dose of forward guidance designed to signal that this is not the beginning of an aggressive easing cycle.

Whether that bet pays off depends on variables — the duration of a military conflict, the behavior of a 35-mile-wide waterway, the confirmation timeline of a Fed nominee — that no economic model can reliably predict.