The Federal Reserve is still expected to cut interest rates twice this year, according to Oxford Economics, even as higher oil prices and renewed inflation concerns complicate the outlook.
In its analysis of the mid-March Federal Open Market Committee meeting minutes, Oxford Economics said the recent rise in oil prices tied to the war involving the U.S., Israel, and Iran has added uncertainty to both inflation and employment. Even so, the firm expects policymakers to place more weight on signs of weakness in the labor market when deciding on rate cuts.
“The minutes highlighted the increased uncertainty surrounding the outlook for both sides of the Fed's dual mandate due to the war. Fed officials think the upside risks to inflation and the downside risks to the labor market have increased. We think concern about the labor market will prevail, but the Fed will want to be sure that the shock from higher oil prices doesn't push long-term inflation expectations higher, raising the risk that the first rate cut comes later than June,” said Nancy Vanden Houten, lead US economist at Oxford Economics.
That view aligns with how Fed officials are describing current labor conditions. While policymakers said the labor market remains “broadly in balance,” they also pointed out that hiring remains subdued, labor force growth is slow, and job gains are concentrated in a few sectors, including healthcare. This leaves the labor market more vulnerable to shocks.
The minutes also flagged the risk that further declines in hiring—whether linked to geopolitical tensions or structural changes such as AI adoption—could push unemployment higher more quickly.
On inflation, policymakers continue to expect price pressures to ease toward the 2% target over time, particularly once the effects of tariffs and higher oil prices fade. Some officials also pointed to stronger productivity growth as a factor that could help bring inflation down.
However, confidence in that path has weakened. Some participants noted that inflation had already shown limited progress even before the conflict, while others highlighted persistent pressure in core services outside housing.
Oxford Economics said this uncertainty is more about timing than direction. It continues to expect two rate cuts this year but said the probability of a move as early as June is “not much higher than 50%,” as policymakers wait for clearer signs that higher oil prices will not push up long-term inflation expectations.
That assumption is central to the firm’s outlook. While short-term inflation expectations are likely to rise with energy prices, Oxford Economics expects long-term expectations to remain stable. The minutes noted that these expectations had held steady in the early weeks of the conflict, though some officials warned they could become more sensitive after several years of above-target inflation.
For now, Vanden Houten said the broader outlook remains uncertain as it is too early to assess the impact of the recently announced cease-fire: “Even if the cease-fire is durable, it will likely take some time for oil prices to return anywhere near pre-war levels.”
