Wobbly jobs data, escalating oil prices and uncertainty over the Iran war have revamped traders’ expectations that the Federal Reservewill resume cutting interest rates aggressively in 2026.
The Fed meanwhile finds its current “wait-and-see” position of holding rates steady facing a divisive internal setting at its next policymaking meeting this month amidst strong investor reaction.
Some top Fed officials say the annual rate of inflation is still too high to support cutting rates in the short term, and at 2.9% exceeds the Fed’s 2% target for the fifth straight year.
Others strongly disagree.
Fed Governor Stephen Miran told CNBC March 6 that the sustained weakness in the labor market over the last six months — including the March 6 disappointing surprise in February payroll numbers and a higher than expected 4.4% unemployment rate — requires the central bank to slash at least 4 additional 25 basis-points cuts off the Federal Funds Rate this year.
Traders responding to the mixed economic data upped the probability of the next Fed interest-rate cut from July to June, according to the CME Group FedWatch tool.
FedWatch’s futures traders also retreated from a second .25 basis-point cut in December.
Ben Fulton, CEO of WEBs Investments, described the increasing tension in both sides of the Fed mandate for maximum employment and stable prices as:
“Volatility has returned! Nothing like a war, the threat of rising inflation, and a lower jobs report to make every economist rethink their position.’’
Fulton added that he “can only assume this includes the Fed, with now many urgent reasons to renew the lowering of rates. Perhaps a very small silver lining in an otherwise unpredictable week of global news.”
Weak jobs data prompts stagflation concerns
Seema Shah, chief global strategist at Principal Asset Management, warned the February job figures are pushing the U.S. economy towards stagflationary territory, Bloomberg reported.
“A cooling jobs market would point to rising economic risk, but it would also keep the door open to rate cuts, particularly as the recent oil price shock has complicated expectations for monetary easing this year,” she said.
“The resulting stagflationary tilt to the macro backdrop is an uncomfortable development for markets already navigating unusually fast‑moving crosscurrents,’’ Shah added.
Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said the weaker-than-expected job numbers “may have put the Fed between a rock and a hard place.’’
“Significant weakening in the labor market would support a rate cut, but given the risk that higher-for-longer oil prices could trigger another inflation surge, the Fed may feel compelled remain on the sidelines,’’ she said.
Federal Reserve Bank of New York via FRED®
Miran downplays escalating oil prices
WTI crude oil futures surged over 11% to above $90 per barrel March 6, the highest since August 2022, as intensifying tensions in the Middle East continued to disrupt global energy trade.
More Federal Reserve:
Oil spikes can seep into:
- Headline Consumer Price Index data immediately.
- Core inflation indirectly via freight, airlines and goods.
- Consumer inflation expectations, which are the Fed’s preferred measure of price stability.
Miran said the oil surge and corresponding boost for costs at the pump related to the Iran war are less of a concern than the labor market.
“Typically, the Federal Reserve doesn’t respond to higher oil prices like that. It [boosts] headline inflation, but it tends to be a one-off shock,” he said.
“When you think about core inflation [which does not include energy prices], it tends to be more predictive of where inflation is going over the medium term than headline inflation,” he added.
FOMC January meeting holds rates steady
The Federal Open Market Committeevoted 10-2 to hold interest rates steady at 3.50% to 3.75% in January after three continuous cuts of 25 basis points in its last three meetings of 2025.
The Federal Funds Rate guides interest rates for investors and consumers on auto and student loans, home-equity loans and credit cards.
For consumers, a delayed rate cut could mean higher borrowing costs that remain in place longer than expected.
It was the FOMC’s first pause since July 2025.
Miran and Fed Governors Christopher Waller dissented from the January vote, saying they would have preferred a 25 basis-point cut due to softening in the labor market.
The FOMC is widely expected to continue to pause rates at the March 17-18 FOMC meeting.
But Fed watchers don’t expect a unanimous vote.
How the Fed manages interest rates
The Fed’s dual congressional mandate requires it to balance full employment and price stability.
- Lower interest rates support hiring but can fuel inflation.
- Higher rates cool prices but can weaken the job market.
The two goals often conflict, operate on different timelines and are influenced by unpredictable global events.
Related: Oil, inflation threaten Fed interest-rate cuts under Warsh
After the December rate cut, Powell said that the lowering of rates brought monetary policy “within a broad range of neutral.”
A neutral rate neither stimulates nor restrains economic growth, the Fed’s preferred state for monetary policy.
President Donald Trump has been demanding throughout his second term that the Fed dramatically slash interest-rates to 1% or less to jumpstart the stagnant housing market and reduce the interest on the national debt.
Fed officials debate jobs, inflation, rate cuts
San Francisco Federal Reserve President Mary Daly said the weak February jobs report adds to a difficult policymaking environment for the Fed.
In a CNBC March 6 interview, Daly did not commit to a position on interest rates, but said a softening labor market combined with inflation still running above the central bank’s 2% target complicate future decisions.
“This jobs market report has got my attention,” she said. “I don’t think you can look through this report, but I also don’t think you should make more of it than one month of data.”
Federal Reserve Bank of Chicago President Austan D. Goolsbee called the February jobs report a “tough miss.”
He also warned against putting too much stock in a single month’s worth of data.
Goolsbee said he was hopeful inflation would resume its progress toward 2%, allowing the Fed to resume rate cuts by the end of the year,
He called recent inflation data was “disturbingly high.”
“If the job market is getting worse and inflation is getting worse at the same time, it’s not obvious to me what the immediate response should be,” Goolsbee said March 6 in an interview with The New York Times.
Waller doesn’t see long-term inflation impact
Waller told Bloomberg Television March 6 prior to the jobs release that he doesn’t expect the Iran war to have a sustained impact on inflation.
While consumers are likely to experience sticker shock as gas prices rise, policymakers will look through any one-off increases, he said.
“For us thinking about policy going forward, this is unlikely to cause sustained inflation,” Waller said, adding “That’s one reason we don’t look at energy prices.
“When we look at core, core is a better predictor of future inflation,” he said, referring to a measure of inflation that strips out volatile energy and food prices.
Related: Fed’s Waller calls March interest-rate cut ‘a coin flip’
