Key Points

  • A survey released Thursday by the National Association for Business Economics (NABE) showed that the Iran war and other geopolitical conflicts are expected to slow economic growth and push up inflation this year and in 2027.
  • When the survey was conducted in late March, as the war entered its fourth week, respondents downgraded their earlier forecasts for the scale of borrowing cost cuts this year. NABE said 33% of respondents expect the Federal Reserve to make no cuts to its key interest rate this year, compared with a median forecast in early March of two 25-basis-point cuts in 2026.
  • "A majority of respondents now expect recent geopolitical developments to lower GDP growth in 2026 and raise both headline and core inflation this year and in 2027," NABE President Gregory Daco, chief economist at EY-Parthenon, said in a statement. "The interest rate outlook is consequently more divided, with respondents nearly evenly split on expectations for no cuts, one cut, or two cuts by the Fed this year."

Deeper Analysis

Since the outbreak of the Iran war on February 28, several Federal Reserve officials have expressed concerns that surging oil prices could push up inflation and weigh on economic growth, potentially forcing the central bank to make trade-offs between its dual mandate of full employment and price stability.

Policymakers may face a dilemma: either raise rates to combat inflation, but potentially dampen employment and economic growth, or cut rates to lower unemployment, but potentially intensify price pressures.

"On one hand, if the Iran conflict is resolved relatively quickly and we are able to reopen the Strait of Hormuz, the impact on economic activity and the labor market could be relatively moderate," Dallas Fed President Lorie Logan said Thursday. "On the other hand, if the conflict persists and reopening the strait takes longer, the negative effects could be greater, and these effects could pull in opposite directions across both sides of our dual mandate, creating significant tension for our responsibilities," she added.

Despite the uncertain economic outlook, policymakers chose on March 18 to hold the federal funds rate in the 3.5% to 3.75% range, marking the second consecutive meeting with no change. "I think policy is well positioned to adjust as data come in, and we stand ready to adjust the policy path as appropriate," Logan said.

The NABE survey showed that respondents' median forecast for the scale of Fed rate cuts this year is 25 basis points. According to NABE, about half of respondents expect the cut to occur this quarter, while the other half expect it in the fourth quarter.

69% of respondents identified "expansion of geopolitical conflicts" as the biggest risk to the U.S. economy, surpassing inflation, tariffs, financial crises, and other threats. In the November survey, only 8% of respondents ranked global conflict as the top risk.

Despite this, economists see a low probability of a recession in the near term. More than half (56%) of respondents expect economic growth to continue through 2027 or beyond. Only 5% forecast a recession this year, compared with 18% in the November survey who expected the economy to begin contracting in the first half of 2026.