US Markets Crash After Fed Keeps Rates Unchanged as Oil Price Shock Amid the Middle East Conflict Plays Out

US equity indexes fell on Wednesday after the Federal Open Market Committee kept the Federal Funds rate target unchanged at 3.50% to 3.75%. The committee stated that the implications of the Middle East conflict are 'uncertain' amid a surge in Brent crude oil prices to over $109 per barrel.

After Israel's missile strike on Iran's South Pars gas field, Iran unleashed a barrage of missiles and drones targeting the energy infrastructure of Gulf nations. Iran damaged the Ras Laffan Industrial City in Qatar, which houses the largest liquefied natural gas plant in the world.

Iran also hit Mina al-Ahmadi and Mina Abdullan refineries in Kuwait, the Habshan gas facility and the Bab oilfield in the UAE, as well as the Samref refinery in Saudi Arabia.

Severe damage to critical infrastructure could disrupt oil supplies for months, even if Iran lifts the Strait of Hormuz blockade, according to experts. Higher oil and gas prices for an extended period could drive global inflation.

The Nasdaq Composite fell 1.4% to 22,152, with the S&P 500 down 1.3% to 6,624. The Dow Jones Industrial Average lost 1.6% to 46,225. US Treasury yields rose, with the 10-year yield up 2 basis points to 4.277%. The two-year yield gained 6.4 basis points to 3.807%.

The updated Summary of Economic Projections signals a single rate cut in 2026 and none in 2027. For this year, the median GDP guidance was revised higher, while headline and core inflation projections were slightly increased.

'The forecast is that we will be making progress on inflation, not as much as we had hoped, but some progress on inflation,' said Fed chair Jerome Powell during a press conference. 'If we don't see that progress, then you won't see the rate cut.'

The US Energy Information Administration said Wednesday that inventories of total US commercial crude oil stocks for the week ended 13th March rose by nearly 6.2 million barrels, compared with 3.8 million in the week earlier, and higher than the 1.5 million decline expected by analysts surveyed by Bloomberg. Crude oil inventories, including the Strategic Petroleum Reserve, stood at 864.7 million barrels, 3.8% higher than a year ago.

Market Crash Accelerates on Hot Wholesale Inflation Print

For February, the Producer Price Index (PPI) for final demand increased 0.7% in February, up from 0.5% in January, while core PPI, excluding food and energy prices, increased 0.5% in February from 0.8% in the month earlier, but higher than the 0.3% expected by analysts surveyed by Bloomberg.

The index for final demand goods advanced 1.1%, the largest gain since August 2023. More than 20% of rise in February is attributable to a 48.9% increase in prices for fresh and dry vegetables.

The report shows that inflation pressures were already mounting before the Middle East conflict began, and higher producer prices could hit US households if they choose to pass them all along. A cut to interest rates would have given the economy and investment prices a boost, but lower interest rates would also worsen inflation.

For the week ending 13th March, US mortgage applications also fell 10.9%, compared with a 3.2% growth from the week earlier, according to data from the Mortgage Bankers Association's weekly survey.

'Mortgage rates continued to move higher, driven by increasing Treasury yields as the conflict in the Middle East kept oil prices elevated, along with the risk of a broader inflationary shock,' said Joel Kan, MBA's Vice President and Deputy Chief Economist.

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