Will the Federal Reserve cut interest rates again? Janet Yellen warns that US-Iran conflict could drive up inflation, with unclear interest rate outlook for 2026

On March 3, former U.S. Treasury Secretary Janet Yellen recently stated that escalating conflicts between the U.S. and Iran could introduce new uncertainties to the Federal Reserve’s interest rate cut path in 2026. As geopolitical risks in the Middle East transmit to energy markets, oil prices and inflation expectations are facing new upward pressures, which may force policymakers to adopt a more cautious stance on interest rate adjustments.

According to foreign media reports, Yellen pointed out that the future inflation trend largely depends on how long the impact of the Iran situation on global oil supply lasts. If oil prices continue to rise, energy costs will quickly pass through to key sectors such as transportation, manufacturing, and housing, thereby pushing up the Consumer Price Index (CPI) and limiting the Federal Reserve’s room for monetary easing.

Currently, market expectations for a short-term rate cut have significantly cooled. Data shows that traders generally believe there is about a 97.4% chance that the Federal Reserve will keep rates unchanged at the March 18 policy meeting, with only about a 2.6% chance of a rate cut this month. This indicates that the market is reassessing its previously optimistic expectations for rate cuts.

Betting markets also show a similar trend. In contracts related to the “Federal Reserve March rate decision,” about 97% of participants expect rates to remain unchanged. Analysts believe that the “inflation risk premium” brought about by rising energy prices is gradually becoming an important variable influencing monetary policy.

Meanwhile, global financial markets have responded noticeably. Major Asian stock markets have pulled back, oil prices continue to rise, and safe-haven assets like U.S. Treasuries are favored by funds, with market volatility increasing. Investor sentiment is shifting toward a defensive mode to cope with ongoing geopolitical uncertainties.

Yellen’s remarks reflect the current dilemma faced by central banks: on one hand, economic growth still requires policy support; on the other hand, energy price shocks could reignite inflation. If oil prices remain high for an extended period, even a decline in core inflation may delay the rate cut process.

The market generally believes that, until inflation shows clear signs of cooling, the Federal Reserve is likely to maintain relatively high interest rates. As the situation in the Middle East develops, volatility in energy markets is becoming a key variable influencing U.S. monetary policy in 2026.