Middle East War and Employment Shock Send U.S. Rate Cut Expectations Plummeting

Amid the war between the United States and Israel against Iran, the likelihood of a U.S. benchmark interest rate cut is steadily declining. With international oil prices rising and the U.S. employment situation deteriorating, concerns about stagflation are gaining traction. As a result, forecasts now suggest that even one or two rate cuts this year will be difficult, compared to previous expectations of two to three cuts.

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On March 8 (local time), the Financial Times (FT) and the Wall Street Journal (WSJ) reported that rising international oil prices and worsening labor market conditions are lowering the probability of a Federal Reserve interest rate cut.

First, employment indicators are showing a gradual decline. On March 6 (local time), the U.S. Department of Labor's Bureau of Labor Statistics announced that U.S. nonfarm payrolls decreased by 92,000 in February compared to the previous month. This is the largest drop in employment since October last year, when government jobs sharply declined due to the U.S. federal government shutdown—at that time, employment fell by 86,000. The unemployment rate in February was 4.4%, up from 4.3% in January. The figure came as a shock, as Dow Jones had forecast an increase of 50,000 jobs.

Recently, oil prices have also become a cause for concern. According to Bloomberg, as of 7 a.m. KST on this day, both Brent crude and West Texas Intermediate (WTI) surpassed $100 per barrel. The closure of the Strait of Hormuz has led to major oil-producing countries rapidly reaching storage capacity. This, in turn, has prompted some countries to cut production, maintaining upward pressure on oil prices.

As a result, concerns about stagflation have intensified. Joe Brusuelas, Chief Economist at global accounting firm RSM, told the FT, "All market attention will remain focused on the direction of energy prices and inflation," adding, "The Fed's ability to respond to recent economic shocks will be a 'real stress test' for interest rate decision-makers."

This makes it increasingly difficult to lower the benchmark interest rate. A sharp rise in oil prices stimulates inflation, while worsening employment can further slow economic growth. Normally, poor employment indicators would prompt rate cuts to stimulate the economy. However, heightened concerns about inflation due to surging oil prices have narrowed the Fed's policy options.

The FT reported that participants in the futures market expect the Fed to cut rates only once or twice this year, with the first cut projected to occur in September. Just last week, the market had anticipated two or three rate cuts starting in July. The WSJ also analyzed that the Fed is likely to remain on the sidelines for the time being. The Fed made it clear that it has no intention of rushing to adjust rates in either direction. Even if concerning indicators emerge, its stance is unlikely to shift based solely on a single month of data.

Austan Goolsbee, President of the Federal Reserve Bank of Chicago, explained at a monetary policy conference in New York immediately after the February employment report, "There is no need to overreact to a single month's data, but an environment where both inflation and unemployment are rising is never welcome for a central bank."

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