The Federal Reserve is facing enormous pressure to cut interest rates. The U.S. and Israel are conducting an active military campaign against Iran, oil prices have surged past $100 a barrel, Strait of Hormuz traffic has ground to a near halt and markets are repricing the global inflation outlook in real time.
The most recent Bureau of Labor Statistics report shows that the American economy shed 92,000 nonfarm payroll jobs in February, the third monthly loss in five months, while the unemployment rate ticked up to 4.4 percent.
As former president of the Federal Reserve Bank of Philadelphia and a voting member of the Federal Open Market Committee, my view is that the Fed should hold rates where they are — not because jobs don’t matter, but because the forces driving today’s labor market troubles and inflation surge are almost entirely beyond the reach of monetary policy.
Start with the war. Roughly one-fifth of the world’s daily oil supply and a comparable share of its liquefied natural gas passes through the Strait of Hormuz. Its effective closure is not a monetary event; it is a supply shock that operates through higher energy prices, compressed real incomes and disrupted supply chains. Analysts at Goldman Sachs warn that if disruption persists and oil is above $100 per barrel, global inflation could rise by nearly a full percentage point. European natural gas prices briefly doubled.
Former Treasury Secretary Janet Yellen has already stated that the Iran conflict puts the Fed “even more on hold, more reluctant to cut rates.” Minneapolis Fed President Neel Kashkari called it “a potentially new shock hitting the global economy.”
Every $10 increase in the price of a barrel of oil adds roughly 0.2 percentage points to consumer prices. A central bank that cuts rates in the middle of that is cutting rates into an accelerating inflationary environment — the very definition of a policy error.
Now turn to the jobs report. Look carefully at what drove February’s losses. Federal government employment fell by another 10,000 and is now down 330,000 or 11 percent from its October 2024 peak, as deferred resignations have rolled through payrolls. The information sector shed another 11,000 jobs, continuing a trend that has cost the industry an average of 5,000 positions a month.
These are workers displaced by deliberate policy choices and by technology. A rate cut will not rehire a federal employee whose position was eliminated, nor restore a job that has been automated.
The broader structural picture reinforces this diagnosis. Demographics are compressing the labor pool as baby boomers retire in large numbers. Immigration restrictions have removed a significant share of the workforce; the Penn Wharton Budget Model estimates that even a four-year enforcement scenario reduces GDP by 1 percent and raises federal deficits by $350 billion. Tariffs, now running at an effective rate roughly five times higher than two years ago, are a supply shock that simultaneously raises consumer prices and eliminates jobs. None of these forces responds to the federal funds rate.
Meanwhile, inflation has not cooperated. Personal consumption expenditures inflation ran at 2.9 percent for 2025, nearly a full percentage point above the Fed’s target, and core services remain stuck near 3.5 percent. Tariff pass-through will push prices higher in the months ahead. The Iranian oil shock will push them higher still.
Milton Friedman warned us about this trap. His 1968 address to the American Economic Association warned that attempting to push unemployment below its natural rate through monetary stimulus leads to accelerating inflation without durable employment gains.
The Fed’s dual mandate assumes that price stability and maximum employment generally move together. Stagflation and an oil shock break that assumption. When the two prongs conflict, the Fed’s comparative advantage is clear: it controls inflation. It does not control the budget, immigration policy, trade policy, the pace of AI adoption or whether the Strait of Hormuz is open.
There is also a fiscal dimension. Total federal indebtedness (including implicit obligations) stands at roughly $91.9 trillion, or 340 percent of GDP, according to the Penn Wharton Budget Model. The unbudgeted costs of the Iran campaign will add to that total. In this environment, premature rate cuts risk signaling that the Fed is subordinating price stability to fiscal convenience. Once inflation expectations slip, re-anchoring them is painful and slow, as the Volcker era taught.
Real help for working Americans must come from the institutions with the right tools. Congress can invest in workforce development and fix immigration policy. The executive branch can calibrate trade policy with workers in mind. And, critically, Congress and the president can develop a serious energy security strategy so that a war in the Persian Gulf does not automatically become an inflation shock for American households.
My colleagues and I have argued for a digital AI land grant act that would fund AI and advanced skills training at community colleges and regional universities. That is the kind of structural intervention that could actually move the needle for displaced workers.
The Fed can and should do its job. What it should not be asked to do is everyone else’s.
