Yesterday, the Federal Open Market Committee (FOMC), the Federal Reserve’s policymaking body, announced its decision to hold short-term rates steady, ending the series of three straight rate cuts that closed out 2025.
Markets sold off in the afternoon, as the move increased inflation concerns and the Fed’s Summary of Economic Projections signaled fewer than expected rate cuts the rest of this year. The S&P 500 fell to its lowest level since last November (now down more than 3% year to date). U.S. Treasuries sold off for the same reasons, causing yields to rise—the 2-year Treasury yield increased 7.5 basis points to 3.746% and the 10-year Treasury increased 5.5 basis points to end the day at 4.257%. The Fed’s dot plot now forecasts only one 25 basis point rate cut in 2026 and another in 2027. Interestingly, one FOMC participant forecasted a 25 basis point rate increase next year, highlighting the extreme level of uncertainty about the appropriate direction of monetary policy. With the 2-year Treasury priced above the Federal Funds Rate, the bond market also appears to be pricing in the possibility for near-term rate increases.
We’ve been here before. In an eerily-familiar setup to today, the Fed under Arthur Burns had been cutting rates throughout the early 1970s (reportedly also under heavy pressure from the Nixon White House). An OPEC oil embargo in the fall of 1973 caused a sharp spike in oil prices. With unemployment and inflation very similar to today, the Fed chose to remain accommodative and cut rates in the face of the oil supply shock. The Fed’s misstep effectively institutionalized the inflationary impact of the supply shock, with rising input costs and loose monetary policy fueling rising inflation and further cementing higher inflation expectations.
How this ultimately plays out in the U.S. depends on two things: the duration of the oil shock and the Fed’s policy response. If the war in Iran is resolved quickly, the recent disruption to oil markets could prove to be temporary—as a rule, policymakers should ignore short-term shocks that result in one-time price shifts. However, if the Fed cuts rates amid the current economic backdrop, they risk a policy misstep reminiscent of their response to the 1973 oil crisis.
Understanding the broader economic landscape is key to long-term decision making. If you have questions about how today’s environment fits into your financial plan, we’re always here to have that conversation.
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