Fed's Powell to deliver a gut check for markets as stocks climb alongside oil prices

By Joy Wiltermuth

Federal Reserve Chair Jerome Powell is due to speak Wednesday on the economy and interest rates for the time since the start of the Iran conflict

Federal Reserve Chair Jerome Powell is due to speak Wednesday for the time since the start of the Iran conflict.

Federal Reserve Chair Jerome Powell on Wednesday could deliver a gut check for investors that sparks more swings in markets, as the Iran conflict drags into its third week.

The Fed isn't expected to change short-term interest rates at its meeting this week, but the central bank's rate-setting committee is due to provide fresh insights about the U.S. economy and the likely path forward for interest rates.

And the Fed chair will be speaking for the first time since the Iran conflict began on Feb. 28, which has Wall Street anxious to hear more about how the central bank's policymakers are feeling about the surge in oil prices so far.

A "no harm, no foul" stance would see the Fed adjust its projections to match what the market is now pricing in, said Jack Janasiewicz, a multiasset portfolio manager at Natixis Investment Management Solutions. That would mean only one interest-rate cut this year and slightly higher unemployment and inflation expectations, he noted.

The big risk, however, would be if Powell starts talking about rate hikes, Janasiewicz said - especially if the Iran conflict ends up trapping the economy in a higher-for-longer environment for oil prices that kills off consumption. That combination "juices up the recession odds," he added.

Read: It was unthinkable a couple of weeks ago, but could the next move by the Fed be a rate hike?

For now, the U.S. stock market isn't reflecting such concerns. The S&P 500 SPX ended Tuesday less than 4% off its record high set in January, gaining ground despite a further climb in U.S. (CL00) (CL.1) and global oil prices.

Brent crude (BRN00), the global benchmark, rose 3.2% Tuesday to over $103 a barrel, a more than three-year high. The surge has drivers paying more for gas at the pump, which puts a further squeeze on household finances beyond the inflation problems evident before the start of the Iran conflict.

"Basically, it's a tug of war," said Mike Treacy, head of market risk at Apex Fintech Solutions. Ramifications of the surge in crude prices are on one side of it, because the global economy is reliant on oil as an input, he noted. On the other side is "this [Wall] Street-wide fear of missing out on these frequent pivots that the administration makes that typically boost the market a lot higher."

That may help explain why the State Street SPDR S&P 500 ETF Trust SPY, an S&P 500 proxy, rose on Tuesday, breaking with its recent trend of moving in the opposite direction of oil prices.

"The market still believes in the TACO trade," said Janasiewicz at Natixis, using the acronym for "Trump Always Chickens Out."

Investors also may be viewing U.S. stocks as more of a haven than their European or Asian counterparts, which look especially vulnerable to the spike in oil prices, Janasiewicz added.

In bonds, meanwhile, investors don't appear to be positioning for worst-case outcomes. Traders in the U.S. rates market, for instance, are signaling that higher oil prices are not yet that big of a problem over the next five to 10 years, even if 2-, 10- and 30-year Treasury yields have all spiked this month.

"The reason the market hasn't penciled in more worst-case outcomes is because we don't know what they are going to be," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. "What we don't know is how long the oil price spike will last and the impact on the economy."

Treacy at Apex sees any change in the Fed's language around the risk of inflation due to geopolitical conflict as likely to unnerve investors. "We should prepare for hawkish messaging and keep and eye on 10-year BX:TMUBMUSD10Y and 30-year BX:TMUBMUSD30Y yields based on what they say."

Kevin Gordon, head of macro research and strategy at the Schwab Center for Financial Research, said he'll be listening for any clues on how the Fed may be viewing this oil shock relative to the one seen in 2022, after Russia invaded Ukraine. After inflation ran hot and oil prices soared that year, the Fed embarked on an aggressive campaign of interest-rate hikes.

Of note, the U.S. labor market has fallen into a much tricker spot than four years ago, with the creation of new jobs largely flatlining and the unemployment rate climbing to 4.4% in February.

Gordon also thinks there should be lower expectations around what Powell will say Wednesday, other than noting the central bank will be watching the economic data closely.

"Much like us, the Fed is in the dark with this," Gordon said. "They have no greater clarity on how long the war will last."

Vivien Lou Chen contributed.

-Joy Wiltermuth

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03-18-26 0800ET