Financial markets remained focused on geopolitical developments in the Middle East this week, with little economic data to digest. Signs that tensions might ease – most notably President Trump’s decision to postpone strikes on Iran’s power plants – provided temporary relief to oil prices early in the week. Planned strikes have now been delayed for a second time, to April 6th. Additionally, President Trump’s trip to China has reportedly been rescheduled for mid-May, fueling speculation that the administration may seek to de-escalate the conflict and pivot back toward major trade negotiations. Despite tentative signs of optimism, the broader geopolitical backdrop remains highly volatile. Peace proposals from Washington and Tehran remain far apart, hostilities continue, and additional U.S. forces are moving into the region. Energy markets have remained acutely sensitive to these developments (Chart 1).

The conflict has exposed vulnerabilities in the global energy supply system, particularly across parts of Asia that rely heavily on Middle Eastern oil and shipping routes. Fuel rationing remains the exception rather than the rule thus far, so the immediate economic impact has come through higher energy prices. In the U.S., average gasoline prices are hovering near $4 per gallon, while diesel prices have moved above that mark. 

Elevated energy prices have complicated the monetary policy backdrop. The Fed has left open the possibility of rate cuts later this year, but policymakers have become increasingly cautious amid renewed inflation risks tied to higher fuel costs and trade disruptions. Market pricing has pushed out rate cuts, and raised the odds of a rate hike (Chart 2). Importantly, this repricing reflects growing uncertainty around the inflation outlook, rather than explicit guidance from the Fed.

Recent communication from Fed officials reinforces this “watchful waiting” stance. Vice Chair Philip Jefferson noted that labor market conditions remain “roughly in balance”, yet he highlighted upside risks to inflation from the recent surge in energy prices and potential tariff pass-through effects. These have stalled disinflation and are likely to keep inflation above target over the near term. He affirmed support for the current policy stance, stating that it is well positioned to respond to evolving risks. Governor Lisa Cook echoed this measured tone, underscoring the need to monitor tail risks that could tighten financial conditions abruptly. 

Looking ahead, the path of the conflict is highly uncertain. Against this backdrop, the Fed is likely to remain cautious, with recent communications suggesting that the path toward eventual easing has not been closed, but it is increasingly contingent on a sustained easing in inflation pressures. Next week features a heavy slate of data, including the first readings for March. The ISMs will be closely watched to see if the conflict has affected sentiment yet, while the jobs numbers will shed light on how “balanced” the labor market remained. The consensus is that both measures will remain fairly steady, but the details will be closely parsed.