“I can’t make up my mind
Someone has to help me
I never seem to know what to do
I just can’t decide for myself…
Someone show me which way to go
I need guiding in my choice
Of what to do
Someone has to help me.“
From “I Can’t Make Up My Mind” by The Zombies, 1965
By Scott Welch, CIMA®, CEPA®, Chief Investment Officer & Partner
Reviewed by Carter Mecham, CMA®, IACCP®
The war in Iran, the concerns about private credit, and the ever-evolving AI saga have all combined to push the Fed off the front pages of the financial media –seemingly for the first time in years.
But we get paid to pay attention, so let’s revisit the Fed and see what we might expect from it as we move through this – so far – most “interesting” year.
We will focus on the two actual Fed “mandates” – inflation and employment – and then turn to the underlying state of the overall economy. Managing the economy is not technically within the Fed’s mandate, but we know it pays close attention to the state of affairs when making its decisions.
Inflation
Inflation, or more specifically the stability of price levels, is a primary Fed mandate. Its policy for years is that a 2% annualized inflation rate is “stable” – in other words, that is its target. There is academic debate about whether or not that is the appropriate target, but that is a discussion for another time.
Where are we today? Three of the most followed (or “headline”) metrics are the Consumer Price Index (CPI), the CPI ex-Food & Energy, and Personal Consumption Expenditures (PCE).
The Fed prefers the PCE metric in evaluating inflation because, unlike CPI, it allows for changes in consumer behavior depending on price levels (e.g., switching from steak to ground beef or from Premium to Regular gas as those respective prices change).
Source: St. Louis Fed (FRED), 5-year data through January 2026. Note that there is a gap in the data due to the government shutdown in the fall of 2025, and also note that these readings came before the opening of the war with Iran,
What we see is that inflation was trending in the right direction toward the Fed’s 2% annualized target but (a) it has remained stubbornly above that target, and (b) these readings are before the beginning of the war with Iran.
Here is the Cleveland Fed’s “Inflation Nowcast” forecast for March. While this estimate came out after the war started, it is too soon to price in any tangible effect.
Source: The Cleveland Fed “Inflation Nowcast,” as of March 13, 2026. This is an estimate and subject to change as additional data come in.
Meanwhile, the Fed’s forecast of longer-term inflation (pre-war estimates and as measured by the PCE) is also expected to remain above the 2% target rate for at least the next two years.
Source: Yardeni Research and the FOMC, as of Q4 2025. These are estimates and subject to change.
Another aspect to consider regarding inflation is input costs, as measured by the Producer Price Index (PPI). Prior to “Liberation Day” in April, many manufacturers stockpiled inventory ahead of anticipated tariff announcements.
Over the course of the year, these producers worked down their stockpiles and also chose to “eat” any increased costs associated with the tariffs rather than pass it through to consumers.
But the PPI has now caught up to CPI (first chart) and producers are starting to pass the higher costs on to consumers (second chart).
Source: St. Louis Fed (FRED), as of February 2026.
Source: Morgan Stanley Research and The Daily Shot, as of March 12, 2026.
Translation: Given that inflation remains above the Fed’s target rate, there is no particular catalyst for the Fed to be aggressive in continuing to cut rates, especially with a new Fed Chair, Kevin Warsh, taking over in May.
With the Iran war still ongoing and oil prices spiking as Iran attempts to shut down the Strait of Hormuz, through which roughly 20% of the global oil supply is transported, the Fed is likely to be even more cautious about cutting rates as it awaits the longer-term inflationary impact of rising oil prices.
The US is relatively energy independent and so has been less affected by the Iranian blockade, but oil is traded on a global market, so we are not immune to rising prices.
Employment
Let’s begin by looking at the “headline” employment metrics – the U3 unemployment rate and the U6 “partially employed” rate.
Source: St. Louis Fed (FRED), as of February 2026. There is a gap in the data due to the government shutdown in the fall of 2025.
We see at the headline level that the labor market appears resilient. The unemployment rate remains below 5%, which historically was considered “full employment.”
Now let’s look at some of the “numbers behind the numbers,” specifically the job openings, hires, and quits rates. We like to focus on the quits rate, as it is an indicator of workers’ confidence in finding a new job if they quit the ones they have.
What we see is a general decline in job openings but relatively stable hire and quit rates – another indication of a generally stable labor market.
Source: St. Louis Fed (FRED), as of January 2026.
Next, let’s look at jobless claims, both initial and continuing claims. These numbers come out weekly and so are the most contemporaneous of the labor metrics. In other words, if there is a softening in the labor market, these metrics are likely to identify it first.
The weekly numbers can be quite volatile, so we focus on the 4-week moving averages to “smooth out” that weekly volatility.
So far, we do not see particular “softening” of the labor markets, but it is still too soon to determine the impact of the war. We will know more over the next 2-3 months.
Source: St. Louis Fed (FRED), data through March 7, 2026.
Translation: Similar to what we saw with the inflation metrics, there is nothing in these numbers (albeit all of which are pre-war) that suggest the Fed needs to be aggressive with rate cuts. There are signs that the labor market is cooling, but it is proving to be remarkably resilient.
The Economy
Let’s begin by looking at anticipated GDP growth. (As with everything else, it is too early to factor in the effects of the war.)
The current estimate for Q4 of 2025 is a mere 0.7%, but that number was dramatically skewed by the lengthy government shutdown and the residual effects of the DOGE government cuts.
The Atlanta Fed currently estimates Q1 2026 growth to be 2.7% – perhaps not robust but solidly positive.
Source: The Atlanta Fed “GDPNow” Forecast, as of March 13, 2026. This is an estimate and will change as additional data come in.
This estimate is generally echoed, though slightly lower, by both the St. Louis Fed (first chart, forecasting 2.04%) and the New York Fed (second chart, forecasting 2.09%).
Source: St. Louis Fed (FRED), as of March 13, 2026. This is an estimate and will change as additional data come in.
Source: New York Fed, as of March 13, 2026. This is an estimate and will change as additional data come in.
Now let’s look at the manufacturing and services sectors, as measured by the Institute for Supply Management (ISM). Based on the metrics it evaluates, a reading above 50 indicates an expanding economy, while a reading below 50 indicates a contracting economy.
Through the end of February, both the manufacturing and services sectors were trending upward and were solidly in “expansion” territory – certainly not an indication of a recessionary economy. It is also worth remembering that services represent roughly 70% of the US economy.
Source: Ycharts, 5-year data as of February 2026.
What about the consumer? Remember that consumption drives roughly 70% of US GDP – we are decades past being primarily a manufacturing society.
Let’s look at retail sales. Through the end of January, nominal retail sales showed continued growth, but once inflation is factored out (i.e., real retail sales), we see a relatively stable level of retail consumption – but not a decline.
Source: St. Louis Fed (FRED), 10-year data through January 2026.
Finally, let’s look at the Citigroup Economic Surprise Index, which measures how actual economic data come in relative to forecasts. The absolute level of the index is relevant, but we focus on the trend or direction of the index. An upward trend means economic data are coming in better than expected, while a downward trend means the data are coming in worse than expected.
What we see is another generally positive signal for the US economy – the index is solidly in positive territory, though it does appear to be trending downward.
Source: Yardeni Research and Citigroup, as of March 12, 2026.
Summary and Interpretation
The Fed finds itself in a difficult situation. If we ignore the war for a moment, there was no particular indication that the Fed needed to do anything. In the wake of the start of the war, the market keeps pushing out the anticipated timing of any potential next rate cut (first chart) and is now only pricing in one rate cut for all of 2026 (second chart).
Source: Atlanta Fed “Market Probability Tracker,” as of March 11, 2026. The Market Probability Tracker estimates probability distributions implied by the prices of options from the Chicago Mercantile Exchange that reference the three-month compounded average Secured Overnight Financing Rate (SOFR).
Source: The Daily Shot, as of March 13, 2026.
The challenge facing the Fed is the uncertainty caused by the war. If the war is prolonged and global oil prices remain high, two potential events may happen – a slowing economy (which might suggest a rate cut) or higher inflation (which might suggest a rate hike).
The danger is “stagflation” – a stagnant economy and high inflation, which puts the Fed very much between a rock and a hard place.
To be sure, we are not there yet. If we shake the cobwebs off the “Misery Index” –the combination of the inflation rate and the unemployment rate – we see that we are currently well below 7%, which is low by historical standards.
Source: Ycharts, as of March 12, 2026. You cannot invest in an index and past performance is no guarantee of future results.
But that was before the war. It simply is too soon to tell which way the wind will blow. If it’s a short decisive war that the US and Israel “win”, the economic effect is likely to be “noise” rather than a “signal.”
But a long, protracted war in which Iran is successful in keeping the Strait of Hormuz bottlenecked may produce a quite different outcome.
As always, the Fed will remain “data dependent,” but we don’t envy the job Kevin Warsh will be walking into in a few months.
We don’t expect any Fed action until mid-summer at the earliest, but it all depends on the direction the war takes.
Our investment philosophy remains to try and build “all-weather” portfolios that have the potential to deliver consistent performance regardless of short-term “noise” and uncertainty in the marketplace. We will, of course, recommend changes if we see longer-term market changes affecting potential risks and returns over a reasonable time horizon.
In the meantime, we continue to recommend patience, discipline, and a focus on a longer-term time horizon.
As always, we welcome your questions and feedback.