Investors from Main Street to Wall Street are eyeing the impact of the Middle East conflict on the U.S. economy, including the resumption of long-anticipated interest-rate cuts by the Federal Reserve.

The wait may be longer than expected. The geopolitical shock might come at the worst possible moment for a would-be Fed chair bringing high expectations of easing monetary policy.

The new volatility creates a rocky road ahead for former Fed Governor Kevin Warsh, President Donald Trump’s pick to be the next Fed chair starting in June.

The president wants dramatically lower interest rates and a much less restrictive monetary policy.

Federal Reserve Bank of New York via FRED®

Fed officials link lower inflation to interest-rate cuts

Federal Reserve Bank of Minneapolis President Neel Kashkari, who had penciled in one interest-rate cut this year, said the attacks on Iran make him less certain about that.

“Now, with the geopolitical events, we need to get a lot more data in,” Kashkari said March 3 at the Bloomberg Invest conference in New York.

Two additional Fed officials on March 3 linked lower inflation, not the labor market, as a path to future interest-rate cuts this year, but avoided commenting on potential higher prices of goods and services as oil prices spike energy costs.

  • Warsh nomination stirs Fed independence fears on Wall Street

More Federal Reserve: New York ​Federal Reserve President John Williams, who is seen as closely aligned with Fed Chair Jerome Powell, said in prepared remarks that the central bank is on track for ‌more interest-rate cuts if inflation pressures moderate as he expects.

“If inflation follows the path I expect, further reductions ⁠in the Federal Funds Rate will eventually be warranted to prevent monetary policy from inadvertently becoming more restrictive,’’ Williams said.

Kansas City Federal Reserve President Jeffrey Schmid signaled his continued opposition to further interest-rate cuts, saying the labor market is in balance and inflation ​is too hot.

“Inflation has been above the Fed’s objective for nearly five ‌years now,” Schmid said in prepared remarks. “I don’t think we ​have room to be complacent.”

Multiple Fed officials, including Federal Reserve Bank of Boston President Susan Collins, Chicago Fed President Austan Goolsbee, and Richmond Fed President Thomas Barkin, have already warned that inflation remains too uncomfortably high to consider cutting rates in the short term, including the March 17-18 meeting of the policymaking FOMC. 

Related: Kevin Warsh’s net worth: The Trump Fed nominee’s wealth & income

Traders look for two rate cuts in 2026

The CME Group FedWatch tool shows the Fed cutting the Federal Funds Rate by a quarter point at its July, and possibly September and December, meetings. Traders originally penciled in the first rate cut of the year for June.

  • 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

Oil spikes can seep into: The price of gasoline in the United States soared 11 cents to $3.11 a gallon, on average, according to the March 3 reading from the American Automobile Association. That marked the largest one-day increase since Hurricane Katrina in 2005.

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 consecutive quarter-point cuts 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.

Fed Governors Christopher Waller and Stephen Miran dissented from the January vote, saying they would have preferred a quarter-point cut due to softening in the labor market. 

Waller said Feb. 23 that he was monitoring the recent stronger-than-expected labor market data and that it could be “a coin toss” as to whether he would vote to hold or cut interest rates at the March 17-18 FOMC meeting.

Miran, a long-time Trump ally, has said inflation is no longer a concern, and called for four quarter-point cuts this year. 

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 shock threatens Fed rate-cut bets

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.

Warsh now facing new interest-rate challenges

President Trump has been demanding 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.

The president’s campaign for lower rates included vows that his nominee to replace Powell when his term as chair in May would support rate cuts, prompting concerns about Fed independence from political influence.

Warsh, seen as an inflation hawk during his previous time at the Fed, has written and spoken in favor of lowering interest rates, citing, in part, an expected increase in labor productivity from AI.

The president has said he has not asked Warsh to cut rates, although he noted that his nominee knows the expectations.

Warsh as chair will have a single vote on the policymaking FOMC, but the role as head of the world’s largest independent central bank includes the task of convincing the other 11 FOMC voters to follow his lead on interest-rate policy.

Will Warsh be able to drive Fed rate cuts in 2026?

The new geopolitical strains on the economy, plus the majority of Fed officials now focused on inflation risk, could hamper Warsh’s ability to deliver the aggressive rate cuts President Trump is expecting. 

“If Chair Warsh wanted to have a sequence of cuts — four rate cuts over the second half of the year or something like that — unless we’re surprised by the data, I just don’t think he’ll have the votes for that,” said William English, Yale School of Management professor and a former Fed division director, told Bloomberg March 3.

 “The outlook is one where that would not be appropriate policy,” English added.

The Fed may still find itself in a position later this year where inflation eases and the labor market holds up, paving the way for “good news” cuts on Warsh’s watch, said Claudia Sahm, chief economist at New Century Advisors and a former Fed economist, according to Bloomberg.

But for now, she added, Fed officials are in a “show-me stage,” waiting for inflation progress.

Easing inflation pressures have been a “significant tailwind” for the bull market that began in 2022, Tony Welch, chief investment officer at SignatureFD, told TheStreet in a March 3 email.

“Keeping oil prices steady is particularly important when we consider the rising cost of electricity that consumers have experienced,’’ Welch said. “For now, we still view the environment as disinflationary (i.e., the rate of inflation is gradually easing), but developments in energy prices are important to watch.

Unless energy prices retreat and price pressures ease convincingly, the next Fed chair may find that delivering the interest-rate cuts investors — and the president — want is more difficult than once thought.

Related: Stock Market Today, Mar. 3: U.S. stocks bounce back after Trump commits to escort oil tankers, offer insurance