By Nicole Goodkind
Federal Reserve officials are facing down a pivotal week for inflation data while contending with growing internal disagreements about the biggest risks facing the U.S. economy.
The divide could shape monetary policy for the remainder of the year. It will determine how high the bar is for future rate cuts, how policymakers respond to an oil shock that has pushed crude prices above $100 a barrel, and whether investors should prepare for a prolonged pause rather than a move toward cheaper borrowing.
One camp, the dovish wing of the Fed, argues the central bank should continue cutting interest rates as the labor market weakens and tariff driven price pressures fade (others, including Kevin Warsh, the heir-apparent to Fed Chair Jerome Powell, want to cut rates based on the belief that AI will lead to a productivity boom without stoking inflation).
The more hawkish, and larger camp, believes inflation has proved too stubborn to risk easing policy again too soon.
Markets already appear to be adjusting to that possibility.
Futures markets assign a 99.4% chance that the Fed leaves interest rates unchanged at its policy meeting next week, according to the CME FedWatch tool. Expectations for cuts later in the year have also diminished. Traders now see a 57.3% chance that the Fed is still on hold in June, up sharply from 24.8% a month ago. The probability of rates remaining unchanged in July has climbed to 41.4% from 15.3% over the same period.
The shift reflects persistent uncertainty about inflation and a debate inside the Fed about how quickly policy should move.
The next clues arrive this week. February's Consumer Price Index is due Wednesday, followed on Friday by the Personal Consumption Expenditures index, the Fed's preferred inflation gauge. They will be the last major data releases before policymakers meet on March 17-18.
Economists expect both measures to show inflation slightly cooling from previous reads. FactSet estimates call for core CPI, which strips away volatile food and energy prices, to rise 0.3% in February from the prior month and 2.5% from a year earlier. Core PCE for January is expected to rise 0.41% on the month and 2.9% year-over-year.
Even so, those numbers remain a ways from the Fed's 2% target, and progress toward it over the past five years has been uneven. Housing costs continue to anchor core inflation at elevated levels while geopolitical tensions in the Middle East are pushing energy prices higher.
"The U.S. economy and markets remain suspended in a delicate balance," said Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management. "The Federal Reserve is treading a thin line between a softening labor market and stubborn inflation that continues to hover above its 2% target."
The balance has become even more complicated after U.S. and Israeli strikes on Iran sent oil prices soaring. Higher energy costs risk feeding into broader inflation while also weighing on consumer spending.
Joe Brusuelas, chief economist at RSM, said the February inflation data may offer limited insight into the economy's trajectory because the energy shock arrived too late to be reflected in the numbers.
"With oil exceeding $100 a barrel over the weekend, it won't be until the March CPI report is released in April that the impact of the conflict will become clear," he said. Brusuelas expects headline inflation to rise in that report as gasoline, airfares, and other energy related costs climb.
Inflation expectations are rising. One year inflation swaps, which allow investors to hedge against the rate of inflation, have risen since the start of the conflict while two year swaps have increased about a quarter of a percentage point, suggesting investors see a renewed risk that inflation settles closer to 3%.
But the labor market is another area where policymakers are weighing mixed signals.
A weak February jobs report showed that employers cut 92,000 payroll jobs, making it the second-worst month after DOGE layoffs reduced federal payrolls by 166,000 in October 2025. Unemployment also edged higher to 4.4%.
But some economists caution that temporary factors such as weather disruptions and labor strikes may have exaggerated the weakness.
The payroll decline should be considered alongside January's unusually strong gains, which were also affected by temporary distortions, said Andrew Husby, senior U.S. economist at BNP Paribas. Still, he expects the Fed to communicate that easing could come soon, even if officials appear reluctant to cut rates in the near term.
The uncertainty is also creating a challenge for Warsh, the former Fed governor currently awaiting Senate confirmation to succeed Powell as the next Fed chair.
Warsh has expressed support for cutting rates relatively quickly, arguing that policy remains overly restrictive as inflation gradually subsides. But the recent surge in oil prices and the persistence of core inflation could complicate that strategy.
If inflation remains sticky or accelerates because of higher energy costs, the Fed may be forced to delay easing or even consider tightening again.
For now, policymakers appear likely to wait. The central bank's internal divide may ultimately lead to the same near term conclusion: patience.
Write to Nicole Goodkind at nicole.goodkind@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 10, 2026 14:10 ET (18:10 GMT)
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