On the eighteenth of March, 2026, the Federal Open Market Committee voted eleven to one to hold the federal funds rate at 3.50 to 3.75 per cent, with Governor Miran dissenting in favour of a reduction. That same week, Brent crude closed above $112 a barrel for the first time since 2022, having risen more than fifty per cent in a single month following Iran's closure of the Strait of Hormuz. The two facts, taken together, present the Federal Reserve with a problem that its instruments were not designed to solve. The rate decision was technically sound, the economic logic was impeccable, and the institution was nonetheless trapped between choices, each of which leads to a destination the Fed does not wish to reach.
The question before the Committee was not, in the formal sense, particularly difficult. Core inflation stands at approximately three per cent, having been pushed higher by tariff effects that the Fed itself cannot address. The oil shock, by contrast, affects headline inflation rather than the persistent expectations embodied in core measures. The traditional response to an oil shock is to look through it, allowing the temporary spike in energy prices to flow through the economy without prompting a policy response that would amplify the recession that high energy costs already threaten to produce. To hold rates steady, therefore, was the technically correct action. Governor Miran's dissent, favouring an immediate cut, was less defensible on the narrow merits; it was nonetheless a dissent in favour of acknowledging, in the institution's formal decision, that the Committee confronted circumstances that had not been its choosing.
The deeper problem is that the traditional framework, which works adequately in most circumstances, provides no guidance whatsoever when the shock originates in neither monetary nor demand conditions but in physical supply. The Fed can adjust interest rates. It cannot create oil. It cannot reopen the Strait of Hormuz.
The Parallel That Haunts the Committee
Arthur Burns faced precisely this dilemma in 1973 and 1974, when the Organization of the Petroleum Exporting Countries imposed an embargo on exports to the United States and Western Europe. Burns was an economist of considerable ability and extensive learning; he was also a man of his era, trained in a tradition that valued the flexibility of monetary policy and the dangers of rigidity. He faced an oil shock and stagflationary pressures that appeared, at the time, to be temporary deviations from a stable underlying process. He chose accommodation; he kept rates lower than inflation suggested appropriate, in the belief that doing so would sustain employment and growth whilst the oil situation resolved itself. The embargo did eventually lift. The oil situation did not resolve itself. The inflation that Burns had accommodated took root in expectations, wage-setting behaviour, and institutional arrangements. It took Paul Volcker's radical tightening of the early 1980s to root it out, and the cost of that effort, in foregone growth and unemployment, was the economic suffering of millions.
The historical parallel is not exact. No parallel ever is. The shock of 1973 was exogenous but potentially reversible in a way that the current Iranian situation may not be. Burns faced inflation that was already embedded in expectations; Powell faces inflation that is partially tariff-driven and therefore amenable, in theory, to resolution through a change in trade policy rather than monetary austerity. Burns possessed less high-frequency economic data than Powell now does. The financial system was substantially different in 1973 from the post-crisis, extensively supervised system of 2026. Yet the structural problem is identical. The Federal Reserve, in 1973 and now in 2026, faces a supply-side shock that demand management cannot remedy. The institution's toolkit was designed to manage demand. Burns responded by trying harder with the only tools available. The decade that followed was the costliest lesson in monetary economics that the modern era produced.
The Fed cannot create oil. It cannot reopen the Strait. Yet it must act as though these constraints do not exist.
The question before Powell and his Committee, then, is whether Burns's error lies in the fact of accommodation itself or in the persistence of accommodation beyond the point at which it became clear that the shock was not temporary. The March 2026 decision to hold rates steady is not itself a repetition of Burns's error; it is an acknowledgment that the shock is occurring and should not be immediately accommodated through rate cuts. The question is what happens when the oil price remains elevated, when the political economy of tariff policy prevents the Fed from communicating clearly about the inflation component that stems from trade policy, and when the temptation to ease, to try to maintain growth, begins to accumulate pressure on the Committee.
The Complication That Makes 2026 Different
The oil shock of 1973 was a single supply-side blow. Powell faces a combination of shocks, layered atop one another in ways that create what one might call a policy dilemma of the second order. The Fed will hold rates steady or eventually cut them if the oil shock fades. The Fed cannot raise rates substantially without signalling that it has abandoned its growth mandate in the face of what is genuinely a supply constraint rather than a demand problem. Yet if the Fed cuts, it will be seen, fairly or not, as accommodating the tariff-driven inflation component of the core rate at 3 per cent. The political economy of the situation has become treacherous.
The tariff regime has independently raised core inflation by between fifty and seventy-five basis points, according to Powell's own estimate in his March testimony before Congress. This means that the Fed now confronts an inflation problem of which it cannot be the cause, and therefore for which rate increases are a blunt and destructive instrument. To raise rates substantially would be to impose pain on the real economy (via higher borrowing costs, reduced capital investment, and employment weakness) for the purpose of controlling an inflation that stems from the executive's trade policy rather than from excess demand. This is not economically irrational; it is the classical central bank response to inflation regardless of origin. It is also politically unsustainable if the inflation stems from a source the central bank did not create and cannot directly address.
The obvious solution is for the government to reverse the tariff regime. This is not a solution that the Federal Reserve can propose, can demand, or can influence through its formal powers. The Committee may hope for it; the Committee cannot engineer it. And so the Fed finds itself in a position analogous to Burns's position: possessing instruments designed to manage demand, confronted with problems originating in supply, and forced to make decisions that will inevitably disappoint someone.
What the Data Now Show
The federal funds rate stands at 3.50 to 3.75 per cent. The personal consumption expenditures price index, the Fed's preferred inflation gauge, is now forecast at 2.7 per cent for 2026, with core PCE at approximately 3 per cent. Brent crude oil has risen from below $70 a barrel in early March to above $112 at the end of the month. The futures market, as of late March, was pricing the fed funds rate not lower but higher by the end of 2026, reversing the market consensus of three months prior that called for rate reductions. The Committee's own dot plot, in its March projection, still showed one rate cut expected for 2026. The market did not believe it.
This divergence between the Committee's own expectation and the market's assessment is worth examining. The dot plot reflects the Committee members' genuine expectation of policy, based on their forecasts of growth and inflation. The market's scepticism reflects the market's assessment of what the Committee will actually do when, as is likely, those forecasts prove wrong, as forecasts inevitably do. The market is, in effect, betting that the oil shock will persist, that the tariff impact will not fade, and that the Committee will eventually be forced to choose between two unappetizing options. Either it will allow the inflation to persist, damaging credibility and possibly pushing expectations higher. Or it will tighten policy sharply, damaging growth and employment, to demonstrate that it will not accommodate supply-side inflation, no matter the cost.
This is the position in which Burns found himself. The market is now pricing the Fed's eventual decision as likely to favour the first path: inflation persisting, rates staying lower than the inflation rate would normally suggest, and credibility slowly eroding as the years accumulate. Whether that assessment proves correct depends on variables the Fed does not control.
The Question of Precedent and Escape
The hopeful case, which Powell has articulated and which the Committee appears to hold, is that the Strait of Hormuz will reopen, oil will fall sharply, and the tariff impact will fade as supply chains gradually adjust to the new trade regime. The oil shock will prove to have been temporary. Core inflation will decline. The growth outlook will improve. And the Committee will have threaded the needle between recession and inflation, vindicated by events and vindicated in hindsight by its decision to hold steady rather than cut or raise rates dramatically.
This is not an unreasonable expectation. Supply disruptions do resolve. Supply chains do adapt. The precedent the Committee might invoke is not Burns but the 2011 earthquake and tsunami in Japan, which disrupted global supply chains and energy markets; the disruption was real, the economic effects were visible, and yet the shock was temporary and did not trigger the kind of long-term stagflation that Burns's era experienced. Powell himself, speaking in March, said the oil crisis "may have only temporary economic effects." The word "may" carries its full weight of uncertainty. But the case for optimism rests on the ground that this time, unlike 1973 and unlike 2021, the Fed has the chance to see the shock as temporary from the start and not accommodate it; if the shock does prove temporary, the decision to hold steady will have been the right one, and history will have been averted.
The counter to this optimism is less sanguine. The Fed said exactly the same thing about inflation in 2021, describing the surge in prices as "transitory," temporary in nature, and not requiring an aggressive policy response. That assessment proved to be among the most costly errors in recent monetary policy. The inflation persisted far longer than the models suggested, not because the Fed was mistaken about the magnitude of the shock, but because it was mistaken about the mechanisms by which the shock would dissipate. The same risk attends the current assessment that the oil shock may prove temporary. The Strait may not reopen. Iran's capacity to close it may be durable enough that the market must adjust to a sustained higher price for oil. The tariffs may not fade; indeed, if the political logic that imposed them remains powerful, they may be extended. And if both of these risks materialise, the Fed will face the position in which Burns found himself: having delayed tightening because the shock seemed temporary, and now finding that the shock is not temporary, and that inflation expectations are beginning to shift.
What Awaits in the Months Ahead
Three variables will matter enormously in the coming months. The first is the physical situation in the Strait. If the blockade holds beyond Q2 2026, or if it becomes clear that Iran has constructed a capability to maintain closure for an extended period, the oil market will adjust to a new baseline price substantially higher than the pre-crisis level. The second is the April and May consumer price reports. If core inflation shows signs of accelerating beyond 3 per cent, the Committee's confidence that the shock is temporary will be tested. The third is the Committee's own dot plot at the May meeting. If the Committee continues to project a rate cut for 2026, the market's skepticism will harden into conviction that the Committee is behind the curve. If the Committee removes the cut from its projections, it will be admitting, formally and in public, that the outlook has changed in ways that were not apparent in March.
Beneath these immediate variables lies a deeper political economy question that no traditional economic analysis can resolve. The tariffs that have contributed to core inflation remain in place by political choice. The Federal Reserve cannot say, in any official forum, that the tariffs should be removed or reduced, because to do so would be to offer political advice and to intrude on the prerogatives of the elected branches of government. Yet the Committee is now trapped inside those tariffs; every rate decision is implicitly a statement about whether the Fed will accommodate the inflation that tariffs have created. If the Fed cuts rates despite tariff-driven inflation, it will be seen as accommodating both the tariffs and their effects. If the Fed raises rates sharply, it will be seen as opposing the administration's trade policy through the instrument of monetary policy, which is to say, through recession and job losses.
This is the position in which Burns found himself with respect to the wage-price spiral of the 1970s; he could not address the wage-setting behaviour that was driving inflation, yet every monetary policy decision was being made inside the constraint of that behaviour. He chose accommodation. The result was stagflation and a decade lost.
The Deeper Lesson of Arthur Burns
It would be convenient to dismiss Burns as simply a failed policymaker, a man who lacked the courage to tighten policy when conditions demanded it. The historical record is more nuanced and, for that reason, more instructive. Burns was not a fool; he was a serious and learned economist confronted with genuinely novel circumstances. He was operating under constraints of both understanding and politics that were real. He made a choice that seemed reasonable at the time, based on the information available, and it turned out to be wrong. The cost of that wrongness was borne not by Burns but by the millions of Americans who lived through the inflation and unemployment of the 1970s and 1980s.
Powell and his Committee find themselves in an analogous position. They are not fools; they are serious economists operating under constraints that are numerous and real. They have made a choice that seems reasonable at the time, based on the information available, and they are banking on the hope that the supply shocks will prove temporary. If they are right, history will vindicate them and the March 2026 decision to hold rates steady will be seen as the correct policy in a difficult situation. If they are wrong, and if the shocks prove durable, the Committee's restraint will have been misplaced accommodation, and a future Chair will be required to impose the kind of painful tightening that Volcker imposed to undo the damage that accommodation created.
What the Fed confronts, then, is not a problem with a solution but a situation with an outcome. The institution's instruments are designed to manage demand. It is being asked to manage supply. The question is not whether the Fed will make the right decision; it is whether a right decision exists.