Rates Hold Steady Amid Stubborn Inflation, Geopolitical Uncertainty

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

Stocks fell for the fourth consecutive week as rising interest rates and surging oil prices—driven by the ongoing conflict in the Middle East—continued to weigh on investor sentiment. Brent crude climbed to $112.19, while West Texas Intermediate (WTI) pulled back slightly to $98.32 from the previous week’s high of $98.71. Despite the slight dip in WTI, prices remain at their highest levels since the summer of 2022.

The bond market has reacted sharply to the conflict. Since hitting recent lows on February 27 (the day before the conflict began), Treasury yields have climbed significantly. The 10-year yield closed the week at 4.382 percent, up from 3.94 percent on February 27th. Meanwhile, the two-year Treasury—a sensitive proxy for expected Fed action—rose to 3.90 percent from 3.37 percent.

Notably, the two-year yield now sits 0.26 percent above the current effective Fed Funds Rate, in a sign that investors believe the Fed may have to raise interest rates. This marks the first positive spread of this magnitude since early 2023, when the Fed was still actively hiking rates. Consequently, the market is now pricing out rate cuts for 2026 and early 2027, with a nearly 40 percent probability of an actual rate hike by October this year. This shift reflects fears of inflation migrating beyond energy and broader commodities and leaking into the overall economy.

We note that on Monday, President Trump announced on Truth Social that he instructed the Pentagon (referred to as the Department of War) to postpone all planned military strikes against Iranian power plants and energy infrastructure for five days, citing “very good and productive talks” between Washington and Tehran. Oil prices fell and treasury yields retreated slightly as a result.

While it remains to be seen how this announcement will continue to play out in the markets, the reality is that last week’s economic data suggests that this passing through of inflation was occurring even before conflict broke out in the Middle East, as price hikes became apparent throughout the U.S. supply chain. The Producer Price Index (PPI) gained 0.7 percent in February, more than double the 0.3 percent forecast. Core PPI, which excludes more volatile food and energy prices, rose 0.5 percent following January’s 0.8 percent jump. This brings the year-over-year increase to 3.9 percent, which is tied for the highest level since January 2025, and to find a higher print you have to go back to February 2023.

The hot PPI data suggests that February core Personal Consumption Expenditures (PCE) inflation could come in at a 0.4 percent monthly. If realized, this would mark the third consecutive month of core PCE running at a 0.4 percent pace—more than double what is needed for a sustainable return to the Fed’s 2 percent target.

As we have previously iterated, the annual core PCE rate currently stands at 3.1 percent as of January 2026, the same level reached at the end of 2023. In other words, the Fed has made essentially no progress toward reaching its 2 percent inflation target over the past two years. Following its meeting, the Federal Open Market Committee (FOMC) raised its year-end median core PCE to 2.7 percent from the previous 2.5 percent, with Chair Jerome Powell citing tariff-related price hikes—describing them as a “reflection of the slow progress” in disinflation—and the recent energy shock’s contribution to stickier inflation.

These inflationary pressures are colliding with a weakening labor market, creating the delicate balance we have frequently cited as a primary risk to the economy and markets. This tension was on full display at this week’s FOMC meeting, as monetary policymakers opted to hold rates steady with one dissent from Stephen Miran, who advocated for a 25bps cut. This marks the sixth consecutive meeting with a dissent, the highest frequency of disagreement among officials since the 2011–2013 period, when the Fed invoked a number of unconventional strategies in an effort to lower long-term interest rates and stimulate a slow recovery from The Great Recession.

Regarding the labor market, Powell noted that private payrolls have seen essentially zero net growth in recent months. The committee believes labor supply growth may also be at zero, creating an unprecedented equilibrium that Powell described as “uncomfortable.” This lack of clarity resulted in a slightly more hawkish dot plot (which shows the anonymous monetary policy expectations of its 19 individual members), still signaling one cut for 2026. This forecast now clashes directly with market pricing and the two-year Treasury, both of which suggest hikes are a real possibility.

The path of monetary policy remains as uncertain as the economic environment itself. Following last week’s FOMC meeting, Powell took a moment to address the recent energy shock. “In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy. We will continue to monitor the risks to both sides of our mandate. We are well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook and the balance of risks.”

We continue to point to the delicate balance that we believe exists in the current environment and recommend maintaining a long-term outlook in times of volatility. From tariffs and geopolitical conflict to a narrowing labor market and the evolving impacts of private credit and artificial intelligence, today’s market environment holds no shortage of short-term risks that are out of our control. What we can control is a focus on broad diversification and strict adherence to a long-term asset allocation strategy crafted by expert advisors. For a deeper dive into our investment approach and outlook, read our most recent Asset Allocation Focus.

Wall Street wrap

Hotter than expected PPI reinforces Fed’s cautious approach: The Producer Price Index (PPI) gained 0.7 percent in February—the fastest monthly gain since August 2023—reinforcing Fed policymakers’ “wait and see” approach on interest rates as they weigh the delicate balance between stubborn inflation and a soft labor market. On an annual basis, headline wholesale inflation accelerated to 3.4 percent, its highest level in a year, led by a sharp 1.1 percent jump in goods prices and a 0.5 percent rise in services. Core PPI, which excludes more volatile food and energy prices, also rose a firmer than expected 0.5 percent for the month and reached 3.9 percent year over year, indicating that price pressures are not limited to just volatile sectors but are becoming more broad-based.

Stock market helps bolster consumer resilience: U.S. household net worth reached a new record of $184.1 trillion in the fourth quarter of 2025, according to the Fed’s most recent Financial Accounts of the United States release on Thursday, as modest gains on corporate equity assets “more than offset a decline in the value of real estate.” The report, which tracks the flow of funds across the U.S. economy, showed that debt of households and nonprofit organizations increased at a seasonally adjusted annual rate of 3.3 percent in Q4 amid slightly slower growth of mortgage debt and steady growth of nonmortgage consumer credit. Meanwhile, domestic nonfinancial business debt expanded by 2.4 percent amid moderate net issuance of corporate bonds and solid growth in mortgage loans.

Manufacturing shows signs of recovery amid lower interest rates: Industrial production rose 0.2 percent in February, according to Fed data released last week, following a 0.7 percent jump the prior month and bringing the year-over-year increase to 1.4 percent. Manufacturing, which represents three-quarters of the total index, also grew 0.2 percent as the sector continues to recover from the drag of higher interest rates. While the manufacturing index remains below its peak from March 2022—when the Fed’s rate hiking cycle began—it has shown signs of resurgence recently, rising 1.3 percent year over year. This stabilization suggests that the combination of lower rates and the stimulative impacts of the One Big Beautiful Bill Act is beginning to impact factory output.

Homebuyers remain cautious: The National Association of Home Builders (NAHB) index, a critical indicator for interest-rate-sensitive sectors, registered a reading of 38 in February 2026. While this remains below the neutral 50 threshold, marking the 23rd consecutive month of contractionary sentiment, it also reflects a recovery from the recent low of 32 seen in September 2025. This modest rebound coincided with the Fed’s initial rate cuts, signaling that while builders still view conditions as poor, the worst of the cycle may be behind them. Notably, prior to the recent geopolitical conflict, there were signs of underlying strength as borrowing costs came down.

“While mortgage rates closed in February near the lowest levels in three years, providing a much-needed boost to builder sentiment and buyer traffic, the outlook remains clouded by persistent affordability challenges and supply side,” said NAHB Chief Economist Robert Dietz.

The week ahead

Tuesday: The S&P Global U.S. Flash Purchasing Managers’ Index (PMI) data for March 2026 is scheduled for release at 9:45 a.m. EST, providing an early snapshot of private-sector health across manufacturing and services. The March report is expected to show continued but modest expansion, potentially stabilizing after February’s 10-month lows.

Thursday: The U.S. Department of Labor will release its Weekly Unemployment Insurance Claims Report at 8:30 a.m. EST. Last week's report (released on March 19) showed that initial claims fell to 205,000, the lowest level since January, indicating a stable labor market with minimal layoffs.

Friday: The final University of Michigan Consumer Sentiment Index for March 2026 is scheduled for release at 10:00 a.m. EST. Preliminary data currently points toward a softening in sentiment compared to February’s modest recovery.

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