Summing up last week’s central bank meetings in one sentence, rising energy prices driven by tensions in the Middle East could push inflation higher, but it’s still too early to assess the scale or duration of the impact on the economy — so for now, it’s a wait-and-see approach, with a tightening bias if things escalate.
Starting with the Fed, the regulator held rates steady at 3.5–3.75% as expected, it flagged the Middle East situation as “uncertain,” raised its 2026 inflation forecast from 2.4% to 2.7%, and nudged the long-run neutral rate up to 3.1%. No wonder the S&P 500, Nasdaq, and Dow Jones all ended Wednesday in the red.
The fact that Powell said he does not plan to step down as Fed Chair while the investigation is ongoing and will remain in his role until a successor is appointed also didn’t help the case. For reference, his term on the Board runs through 2028, so Trump won’t be able to push the central bank’s agenda in his favor for much longer.
In Europe, the ECB, although leaving interest rates unchanged for the sixth straight meeting, has several officials openly discussing a potential hike in April. In a stress scenario, inflation could reach 6.3% within a year. Meanwhile, markets have fully priced in three quarter-point hikes this year.
In the UK, expectations are even more aggressive, with four hikes now priced into swaps. Japan, in turn, remains on its gradual tightening path, signaling that as long as real rates stay deeply negative, rate hikes will continue. That said, this was already the baseline even beforу Iran war, thus nothing materially new here.
Australia was the only one to take action, delivering another 25bp hike to 4.1%.
In short, most central banks are tightening cautiously. Now, if Iran were to block the Strait of Hormuz, hawkish rhetoric suggests regulators could take direct action, which could further hurt markets.
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