Back and forth

Markets ping-ponged from headline to headline about the Iran conflict, with both equity and bond market volatility increasing to early 2025 levels. The S&P 500 index reached new highs in January before catching a downdraft in March; after falling in February, Treasury yields have risen in March on inflation concerns and the Federal Reserve response. 

Little real-time economic data has been released so far in March. But weekly jobless claims remain low, and the mid-month University of Michigan consumer confidence survey held firm, with current conditions improving slightly while expectations slipping. Near-term inflation expectations stayed at 3.4%, while longer-run expectations actually declined, from 3.3% to 3.2%, suggesting a relatively short-lived impact from recent events. 

How long this steadiness can continue remains to be seen, especially as the average price of gasoline has jumped by a third to $4.10 a gallon. In its March policy-setting meeting, the Fed made clear it is in wait-and-see mode. That makes sense. After all, if the war persists, policymakers may need to act to restrain inflation. Conversely, if it concludes soon, economic conditions may return to their pre-war levels, possibly giving the Fed room to cut its fed funds rate. Policymakers have time to be patient.