A Conflicted Fed: Balancing the Dual Mandate During Global Conflict
After a long history of bank runs and financial panic in the late 1800’s and early 1900’s, Congress recognized that the United States was in dire need of a central authority to provide liquidity to the fragile banking system of the day. So, in 1913, Congress passed the Federal Reserve Act to try and develop a decentralized structure to balance the interests of private banks with public responsibility. The result was the creation of a new federal agency known as the Federal Reserve.
Today, the Federal Reserve, or Fed, serves as the primary regulator for many financial institutions, supervising bank holding companies and helping manage risks that could impact the broader US economy. But perhaps their most important role is defined within their dual mandate. This mandate requires the group to balance maximum employment (labor market) and price stability (inflation). They have historically worked to satisfy their mandate by adjusting the Federal Funds Rate, effectively influencing and managing the cost of money (interest rates) to tighten, loosen, or maintain the US’s money supply.
But what happens when the two legs of the dual mandate are pulling the Fed in two very different directions? In this edition of the Elevate Edge, we’ll dive into the factors at play and the delicate balancing act that lies ahead for the Fed.
Inflationary Impacts of Global Conflict
The escalating conflict in the Middle East, particularly involving Iran, has disrupted global energy supply chains, leading to significant inflationary pressures on the overall economy. The near closure of the Strait of Hormuz, a crucial waterway that normally sees around 20 million barrels of crude oil and other petroleum products travel through its waters every day, has resulted in a major disruption in global supply. As a result, oil prices have been subject to some extreme volatility, rising sharply in the weeks following the start of the conflict.
While most people understand that less available oil means increased prices for oil, many everyday consumers may not realize that this tightened supply affects a lot more than just oil prices; oil is an irreplaceable input for many consumer products and goods, leading to projected price increases across many sectors and an amplified impact on global economic growth. While the true impact won’t be known until future economic data releases, that doesn’t stop estimators from projecting the potential implications and developing an estimated increase to US inflation numbers.
The Fed estimates that the current conflict in the Middle East, alongside tariffs and other economic factors, will add approximately 0.8 percentage points to headline inflation and 0.3 percentage points to core inflation this year(1). Other estimates paint a darker picture. The Organization for Economic Cooperation and Development (OECD) is projecting that all-items inflation in the US will be at 4.2% for 2026(2) (significantly higher than the Fed’s 2.0% target). Regardless of the pinpoint accuracy of these estimates, you would be hard pressed to find an economic forecaster who is suggesting inflation won’t rise as a product of global conflict.
Throughout history, the Fed’s common reaction to sudden, supply-driven spikes in inflation is to try and stabilize prices by holding interest rates steady or even potentially increasing rates.
Labor Market Uncertainty
At the same time, the United States is experiencing a volatile and cooling labor market. Recent economic data has been mixed; while the economy added 126,000 net jobs in January, it experienced a sharp reversal in February with 92,000 net jobs lost(3). This contraction caused the unemployment rate to tick up to 4.4%. While the underlying metrics (quits rate, layoff rate, and job openings) suggest that the labor market remains steady, the softening of recent data indicates that higher interest rates and business uncertainty are beginning to take their toll on labor overall.
Historically, the Fed’s reaction to a cooling labor market has been to ease monetary policy by cutting interest rates, as a weakening jobs picture typically provides the justification needed to lower borrowing costs and stimulate economic growth.
The Fed’s High-Wire Act
The Federal Reserve currently faces a severe policy dilemma, caught between a softening labor market and an unexpected, geopolitically driven inflation spike. Following the escalation of the Middle East conflict, oil prices have surged, which will almost certainly increase both headline and core inflation this year. At the same time, the U.S. labor market is showing signs of cooling, resulting in an uncertain labor market and a predicted increase in the country’s unemployment rate.
This dynamic really paints the Fed into a corner, where they’ll potentially be forced to decide between preserving economic growth (cutting rates) and reining in sudden inflationary pressures (holding/increasing rates). Given this uncertainty, the Fed’s primary recourse is currently a cautious “wait-and-see” approach. Even though forecasts in late 2025 anticipated multiple rate cuts in the first half of 2026, new data has rapidly changed that line of thinking. At its March 2026 meeting, the Fed held its target policy rate steady at 3.50%–3.75%. Analysts generally expect the Fed to hold rates steady until inflation moderates more decisively, potentially delaying prospective rate cuts into late 2026 or 2027.
Portfolio Construction During Periods of Uncertainty
Simply put, this is why we diversify. When markets become increasingly reactive to volatility and uncertainty, we spend a lot of time reminding clients of why we structure and manage accounts the way that we do. Having exposure to markets across the globe, not being limited to proprietary holdings or funds, and taking a risk-focused, comprehensive approach to portfolio construction become even more important in times like these.
It also highlights why we invest for the long-term: markets are historically resilient. For long-term investors, we believe that staying invested and weathering the storm is the best course of action. Markets can be irrational longer than many investors can be rational, which is why working with an advisor can help investors navigate the uncertainty.
If you have questions about how we’re managing through the economic changes that lie ahead, please reach out. We would love to discuss it with you.
Sources
The Fed – FOMC meeting commentary March 2026 – Nuveen https://www.nuveen.com/en-us/insights/investment-outlook/fed-update
OECD Economic Outlook, Interim Report March 2026 https://www.oecd.org/en/publications/2026/03/oecd-economic-outlook-interim-report-march-2026_254a8d56.html
The Fed – FOMC meeting commentary March 2026 – Nuveen https://www.nuveen.com/en-us/insights/investment-outlook/fed-update
Disclosures
Investment advisory services offered through Elevate Wealth Management, LLC, a registered investment advisor. The firm’s ADV Brochure and Form CRS are available, at no charge, by request at information@elevateasset.com or 307.461.5550 and are available on our website www.elevateasset.com. They include important disclosures and should be read carefully.
This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment, or tax advice. No investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Before investing, consider investment objectives, risks, fees, and expenses.