So here's how the Federal Reserve's week went. On Wednesday, they released the minutes from their March meeting, and the message was pretty clear: after weeks of building tension, the central bank was no longer ruling out interest rate hikes. It was a significant shift in tone.

But by the time those minutes hit the wires, they were already kind of... historical. Because on Tuesday evening, President Donald Trump announced a two-week ceasefire with Iran. And the very oil price shock that had the Fed talking about hikes started unraveling in real time.

What the Fed Was Worried About

The minutes from the March 17–18 meeting showed just how much the Middle East conflict had scrambled the Fed's plans. Front-month crude oil had jumped about 50% between meetings. A key market-based inflation gauge, the one-year inflation swap, had risen nearly 50 basis points. The most likely path for interest rates, as implied by options markets, had shifted from expecting one cut in 2026 to expecting no cuts at all.

The Federal Open Market Committee (FOMC) ultimately decided to hold the federal funds rate steady at 3.50–3.75%. Almost everyone was on board with that pause. Only one participant, Governor Stephen Miran, dissented, preferring a 25-basis-point cut because he believed the current policy was still restrictive and hurting labor demand.

But the real story in the minutes wasn't about holding steady. It was about how the conversation had moved well past "when do we cut?" and into "could we actually need to hike?"

The Shift From Cuts to Hike Risks

Most Fed officials saw a tricky situation: elevated risks that inflation could go higher and that employment could weaken further. That's a two-sided threat that gives central bankers nightmares because fighting one problem can make the other worse.

While many said it was too early to know the full economic impact of the Middle East turmoil, a lot of them pointed to the danger of persistently high oil prices. Their worry was that this could force the Fed to raise rates to stop inflation from getting stuck at high levels.

Some officials even argued for changing the official post-meeting statement to include "two-sided" language—a formal signal that rate increases were now a live option on the table.

"Many participants pointed to the risk of inflation remaining elevated for longer than expected amid a persistent increase in oil prices, which could call for rate increases," the minutes stated plainly.

The Fed wasn't just watching the price at the pump. They were worried about what years of above-target inflation had done to everyone's expectations. If people and businesses start expecting permanently higher inflation, it becomes a self-fulfilling prophecy. The Fed's preferred inflation measure, core PCE (which strips out food and energy), was running at 3.0–3.1% in January and February. That's a full percentage point above their 2% target. The Fed's own staff revised their inflation forecast higher and said the risks were now more tilted to the upside than they were back in January.

And Then, a Geopolitical Curveball

Enter President Trump. On Tuesday evening, he announced the two-week ceasefire with Iran, coming in just under the wire before an 8 p.m. ET deadline to resume strikes.

Oil markets reacted instantly and violently. West Texas Intermediate (WTI) crude, tracked by the United States Oil Fund (USO), crashed more than 16% to $92 a barrel. That put it on track for its worst day since the chaos of April 2020. Brent crude fell nearly 17%.

Stocks, predictably, loved it. The S&P 500 jumped about 2.56%, and the Nasdaq climbed 3.46%. It was a genuine relief rally. But before anyone gets too comfortable, let's do the math. Crude is still trading about $25–30 per barrel higher than it was in late February, before the conflict escalated. Gasoline futures are still roughly 70 cents per gallon above their pre-war levels. The inflation problem got smaller overnight, but it didn't disappear.

So What Does the Fed Do Now?

The March minutes had essentially laid out two equally plausible but opposite paths for the Fed.

Path one: The conflict drags on, oil stays high, inflation remains sticky, and the Fed is eventually forced to hike rates to contain it.

Path two: The labor market weakens more, consumer demand buckles under the weight of high energy costs, and the Fed ends up cutting rates to cushion an economic slowdown.

The ceasefire announcement makes the first path—the rate hike path—much less likely, at least in the near term. Prediction markets, as of Wednesday, show a 98% chance the Fed does nothing at its next meeting on April 29, 2026, which aligns with the near-unanimous hold from March.

Looking at the full year, the markets are pricing in a spread of possibilities: a 29.2% probability of zero cuts in 2026, a 26% chance of one cut, and a 20% chance of two cuts.

The ceasefire lowers what traders call the "tail risk" of rate hikes, but doesn't erase it. Prediction markets still assign a 14% probability to at least one rate increase before the end of the year. That number had been climbing sharply right up until Tuesday's announcement.

A Glance Back at History: 1990–1991

There's a useful historical parallel here. In August 1990, after Iraq invaded Kuwait, oil prices doubled in three months. Everyone thought the Fed would have to hike rates aggressively to fight the resulting inflation spike.

But that's not what happened. The Fed held rates steady and then started cutting in early 1991. Why? Because a recession was already underway. The economic slowdown destroyed demand, which did the inflation-fighting work for the central bank. Once the Gulf War ended, oil prices reversed sharply, and the rate hikes the market had priced in never arrived.

The rhyme with today is clear: an energy shock makes everyone expect rate hikes, but if the conflict resolves before the economy fully cracks, the Fed might find the problem solves itself as oil prices fall.

The key difference this time? Inflation was already running above 3% before this latest oil shock hit. That gives the Fed much less room for error or complacency than it had back in 1990. The ceasefire is a major de-escalation, but the underlying inflation story isn't over yet.