By Randall W. Forsyth
Nowhere to run, nowhere to hide.
As the U.S-Israel "excursion" into Iran, to use President Donald Trump's description, ended its third week, investors could find no shelter in the usual hedges of bonds and gold as the stock market posted its fourth straight losing week.
Only cash, in U.S. dollars, provided protection as the Federal Reserve and other major central banks signaled they were disinclined to provide relief in the form of interest-rate reductions. Indeed, expectations about future rate moves have flipped as the rise in oil prices makes the central banks' inflation problem only stickier.
On Friday, futures markets, which before the start of the Iran war on Feb. 28 had priced in two quarter-point Fed cuts by year end, were placing a one-in-three chance of a quarter-point increase by December. Over that span, the Two-year Treasury -- the note most sensitive to Fed policy expectations -- saw its yield jump by one-half of a percentage point, to 3.89%.
That's even though the Federal Open Market Committee this past week, as expected, maintained its federal-funds range of 3.50% to 3.75%. The Fed's Summary of Economic Projections also found a median guess of a single quarter-point reduction by year-end, the same as the previous SEP released in December.
Notably, there was only a single dissent from the FOMC's standpat decision, from Fed governor Stephen Miran, who has been vociferous in calling for sharp rate reductions. Christopher Waller, who had also dissented in January in favor of an additional cut, this time voted with the rest of the committee. In an interview on CNBC on Friday, Waller cited uncertainty over the war for a more cautious approach.
In fact, the major central banks were all taking a more conservative tack as they faced questions about how much and how long the war with Iran would boost oil prices. The European Central Bank, the Bank of England, and the Bank of Canada held their policy targets while the Reserve Bank of Australia boosted its key rate a second time to counter inflation.
Expectations of further monetary easing had been among the factors that helped lift major U.S. stock benchmarks to records before the war, with the Dow Jones Industrial Average hitting the 50,000 mark earlier this year. But in terms of the S&P 500, the 7% decline from its high has been relatively muted given what the International Energy Agency called the biggest oil supply disruption in history.
For now, central bankers worry that the surge in crude oil prices that took Brent, the international benchmark, to as high as $119 a barrel this past week, could feed into "core inflation," which excludes food and energy costs. But a surge in crude prices has also preceded nearly every recession in the past half-century. That presents the Fed with a classic conundrum, especially given its dual mandate of maintaining maximum employment and low inflation.
Bank of America U.S. economist Aditya Bhave lists several conditions the Fed would need to see before hiking rates. First, the unemployment rate would need to remain below 4.5% (a tick more than February's 4.4% reading), with "modest" payroll growth, steady unemployment claims, and stable-to-firming job openings. Energy prices would also have to start affecting other costs such as shipping, fertilizers, or chemicals. Finally, longer-term inflation expectations would need to show signs of becoming untethered, he wrote in a research note Friday.
The policy response would also depend on how high oil prices rise. Bhave thinks Fed rate hikes are most likely with West Texas Intermediate crude averaging between $80 and $100 a barrel this year. (The U.S. crude benchmark settled on Friday at $98.32, up 46.7% since the beginning of the month.)
But a steeper increase in oil would threaten recession and the labor market. Similarly, Deutsche Bank economists led by Matthew Luzzetti estimate that if WTI holds at or above $100 over the next quarter the economy would enter a "danger zone" of "nonlinear effects" on inflation and employment -- economist-speak for the worst of all worlds.
For now, markets appear to anticipate that the oil surge will mainly boost inflation rather than trigger recession. That's evident in the Treasury market, with the benchmark 10-year yield hitting 4.39%, up sharply from 3.95% before the war, while the 30-year long bond approached 5%; both represented eight-month high yields.
Higher yields evidently weighed on gold, which plunged 9.54%, or $482.10 an ounce, to $4,570.40 for the front month Comex contract. Traders also may be selling what they can to cover losses in other markets, a number of observers posited. Even with the sharp retreat from its record $5318.40 on Jan. 29, nearby March futures are still up 5.66% so far this year.
Events in the Middle East driving oil prices will continue to be the main focus of the markets. With a promised quick resolution of the Iran conflict still being touted by both U.S. and Israeli leaders, time hangs heavy over financial markets, policymakers, and politicians.
Evercore ISI's strategy team led by Julian Emanuel calls time a crucial factor as to whether their bullish base case for stocks holds. Double-digit earnings growth and significant hedging by traders could mean a rerun of the rebound seen after last year's Tariff Tantrum.
But $4 a gallon gasoline could pose a bigger hurdle. (AAA found a $3.912 average price for regular gas on Friday, up from $2.934 a month earlier.) Previous spikes to $4 at the pump have catalyzed stagflation, including a minor bear market in 2022 and a major bear market in 2008, they wrote in a client note.
With the Fed no longer likely to provide rate cuts, stresses remaining in credit markets, and surging energy prices carrying the danger of worsening inflation, unemployment, or both, it all adds up to "one of the riskiest moments of the 21(st) century," Emanuel et al. conclude.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 20, 2026 18:18 ET (22:18 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
