Fed Holds Policy Rate Steady — Iran Crisis Creates

📡 THE SIGNAL — What Happened

Why it matters: The Federal Reserve's decision to forgo a rate cut, citing rising energy prices due to the situation in Iran, indicates that the U.S. economy is falling into a "path-dependent" trap where geopolitical risks erode the flexibility of monetary policy. Global financial markets are tied to the Fed's next move, and this decision will directly impact the monetary policy, exchange rates, and stock markets of various countries, including Japan.

• Monetary Policy — The FRB (Federal Reserve Board) decided to keep the policy interest rate unchanged at the FOMC meeting on March 18, 2026.
• Monetary Policy — FRB Chair Powell explicitly stated that rate cuts would not occur until inflation is confirmed to have settled.
• Geopolitics — The escalating situation in Iran was cited as the primary cause of rising energy prices.
• Energy — Chair Powell mentioned that the impact of rising energy prices due to the Iran situation on the American economy is uncertain.
• Market Sentiment — The financial market widely expects a slower pace of future rate cuts.
• Inflation — The risk of rising energy prices reversing the downward trend in core inflation has emerged.
• Exchange Rates — Following the FRB's decision to keep rates unchanged, upward pressure on the dollar continues, maintaining a yen depreciation trend.
• Bond Market — U.S. Treasury yields tend to remain high due to receding rate cut expectations.
• Economic Indicators — In early 2026, the U.S. PCE core deflator hovered between 2.5% and 2.8% year-on-year, still exceeding the FRB's 2% target.
• Crude Oil Market — WTI crude oil futures traded in the $85-95 per barrel range amid the escalating situation in Iran.
• Employment — The U.S. labor market remains robust, with the unemployment rate stable around 4%, thus reducing the urgency for rapid rate cuts.
• International Impact — The FRB's continued rate hold increases capital outflow pressure from emerging markets and prolongs the global tightening financial environment.

The FRB's decision to keep policy rates unchanged in March 2026 is rooted in the complex interplay between U.S. monetary policy and Middle Eastern geopolitics over the past half-century. To understand this structure, one must go back to the 1970s.

During the First Oil Crisis in 1973, OPEC's (Organization of the Petroleum Exporting Countries) embargo quadrupled crude oil prices, and the U.S. economy faced an unprecedented situation of stagflation (simultaneous economic stagnation and inflation). Arthur Burns, the then-FRB Chair, succumbed to political pressure and failed to tighten sufficiently, allowing inflation to become entrenched. This "Burns's blunder" served as a cautionary tale for subsequent FRB Chairs, embedding a cultural DNA in the Federal Reserve that fears the entrenchment of inflation expectations above all else.

In 1979, Paul Volcker became FRB Chair and tamed inflation with a dramatic tightening that raised the federal funds rate to over 20%. This "Volcker Shock" caused a severe recession but, in the long run, suppressed inflation expectations and laid the foundation for the subsequent "Great Moderation." Chair Powell's current stance—not to cut rates until inflation is definitively settled—is precisely in line with this Volcker-esque prudence.

The inflation cycle of the 2020s began with supply constraints after COVID-19 in 2021 and accelerated with soaring energy and food prices due to the Russia-Ukraine war in 2022. The FRB entered a rapid rate-hiking cycle from March 2022, raising the federal funds rate from 0.25% to 5.25-5.50%. Although it shifted to gradual rate cuts from late 2024, the pace has consistently fallen short of market expectations.

Entering 2026, a new geopolitical variable was added to this equation: the escalating situation in Iran. The intensifying conflict between the U.S./Israel and Iran over the Iranian nuclear program, security risks in the Strait of Hormuz, and strengthened sanctions on Iranian oil exports are increasing uncertainty in global energy supply. The Strait of Hormuz is a critical chokepoint through which approximately 20% of the world's crude oil transport passes, and its destabilization could lead to a sharp rise in crude oil prices.

For Chair Powell, this situation presents an extremely vexing dilemma. On one hand, prolonged high interest rates increase the burden on the housing market, small and medium-sized enterprises, and consumers, raising the risk of recession. On the other hand, if inflation expectations reignite due to rising energy prices, the FRB's credibility would be undermined, necessitating more aggressive tightening in the future. Chair Powell judged the latter risk to be more significant and, while adhering to a "data-dependent" stance, opted for a de facto halt to rate cuts.

Behind this decision is also the trauma of the "transitory inflation" misjudgment of 2021-2022. At that time, the FRB maintained the view that "inflation is transitory," leading to a delayed response. Chair Powell himself acknowledged this misjudgment and subsequently adopted an "overly cautious" stance. The current approach of not rushing to judge whether the energy price increase due to the Iran situation is "transitory" or "structural," and instead waiting for data accumulation, is precisely a product of this trauma.

The impact on the Japanese economy cannot be overlooked. The FRB's delayed rate cuts will exacerbate dollar appreciation and yen depreciation, pushing up Japan's import costs—especially for energy and food. While the Bank of Japan has been pursuing gradual monetary policy normalization since 2024, yen depreciation pressure will persist as long as the interest rate differential with the FRB does not narrow. This will also affect Japan's inflation rate, complicating the BOJ's policy decisions. In the chain of global monetary policy, the scenario where a single FRB decision creates ripple effects across central banks worldwide once again highlights the structural dominance of the U.S. dollar as the key currency since the collapse of the Bretton Woods system.

The delta: With the FRB effectively halting rate cuts under the banner of "data dependence," the shift in monetary policy has been held hostage by geopolitical risks—particularly the situation in Iran and energy prices. As a result, the scenario of a monetary easing cycle expected from late 2024 has been significantly revised, and "higher for longer" interest rates are once again becoming the market consensus.