Later today, Federal Reserve Chair Jerome Powell will hold what is probably the final meeting of his tenure. Yet, with the federal funds rate at 3.5%–3.75%, the final curveball isn’t the pressure from Washington, but a genuine stagflationary dilemma that leaves the central bank with no room to move.
Fed entered 2026 flirting with a rate cut down the road. The U.S. dollar sank, precious metals surged, and equities kept above the water, hoping that the “wait-and-see” approach eases or succumbs to Washington.
Yet, that hope dispersed once the war with Iran drove renewed cost-side inflation. The World Bank has warned of a 24% surge in energy prices this year—the largest in four years—driven by the ongoing conflict in the Middle East and by severe supply shocks from the closure of the Strait of Hormuz.
“The war is hitting the global economy in cumulative waves through higher energy prices, then higher food prices, and then higher inflation, which will push up interest rates and make debt more expensive,” Indermit Gill, World Bank’s chief economist, wrote in a report.
With Brent oil forecast to average $86/bbl and potentially hit $115/bbl if hostilities escalate, Powell cannot pivot to easing without risking an inflationary spiral.
The Growth Trap
While …
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