Recent economic data point to moderating growth alongside rising inflation pressures, as the U.S.-Israeli military campaign against Iran that began on February 28 drove a sharp spike in crude oil prices, flattening of the Treasury yield curve, and broad declines across equity markets. Headline inflation held at 2.4% year-over-year in February and the unemployment rate rose to 4.4% as Nonfarm Payrolls unexpectedly contracted, yet the Federal Reserve held policy steady amid elevated uncertainty around the energy shock. The Chandler team expects the Federal Reserve to remain data dependent, with the path of policy tied to the duration of the conflict and the trajectory of core inflation.
The Federal Open Market Committee concluded its March meeting by holding the federal funds rate unchanged at the range of 3.50% to 3.75%, marking a second consecutive pause following three 25-basis-point cuts at the end of 2025. The 11-1 vote saw Governor Stephen Miran dissent in favor of a quarter-point cut, while Governor Christopher Waller voted with the majority to hold. Chair Jerome Powell noted that near-term inflation expectations have risen on the oil price surge and stated that it is too soon to assess the full economic impact of the conflict. The updated Summary of Economic Projections showed modest upward revisions to GDP and PCE inflation for 2026.
Treasury yields were notably volatile in the first quarter, as the Iran conflict heightened energy-driven inflation concerns in a market already contending with persistent core price pressures. By the end of March, the 2-year yield had risen to 3.79%, up 32 basis points year-to-date, while the 10-year reached 4.32% and the 30-year 4.86%. The spread between the 2-year and 10-year narrowed to 52 basis points, signaling a marked flattening of the curve as short-term rates increased more rapidly than longer-term yields. For context, this spread was approximately 32 basis points a year earlier, highlighting the ongoing normalization following the yield curve inversion from 2022 through 2024. Meanwhile, the 3-month to 10-year spread stood near 64 basis points at month-end.
The yield curve normalized sharply in March as the oil shock stemming from the U.S.-Israeli campaign against Iran pushed inflation expectations higher. At the same time, shifting sentiment around additional rate cuts drove yields in the 2- and 3-year part of the curve above money market rates, while the 3-month yield remained anchored near the federal funds rate. Volatility remained elevated throughout the month. The Chandler team expects the policy path to hinge on whether the energy shock proves transitory and whether labor market softening deepens into a broader slowdown, which could revive the case for easing later this year.