Economy, the Fed, and Rates…
March 31, 2026
Economic Data
- The inflation shock is no longer hypothetical. Bloomberg Economics’ nowcast points to a very hot March CPI, with headline inflation tracking at ~3.4% y/y after 2.4% in February, driven by gasoline, with core goods also accelerating. The more important point is composition: this is no longer just oil. Computer accessories, autos, and apparel are increasingly becoming secondary pressure points.
- Iran war delivers a synchronized global growth shock. S&P Global March PMIs showed marked declines across manufacturing and services from Australia to Europe to the U.S. Such declines represent the first broad-based deterioration tied to the conflict now entering its fifth week. Input-cost inflation in Germany accelerated to its fastest pace in over three years. The IEA’s Fatih Birol has called this the greatest energy security threat in history, noting that more oil has been lost than in the twin shocks of the 1970s, and gas disruption exceeds what Europe lost after Russia invaded Ukraine.
- Consumer psychology worsened as the war dragged on. Final March University of Michigan sentiment fell to 53.3, below February’s 56.6, while one-year inflation expectations jumped to 3.8% from 3.4%. Bloomberg also notes economists raised year-end inflation forecasts while trimming growth, spending, and employment expectations.
- Import prices signal multiple inflation channels opening simultaneously. February import prices surged 1.3% m/m (vs. 0.6% est.), the largest monthly gain since March 2022. Ex-petroleum import prices rose 2.8% y/y, the fastest since mid-2022, and capital-goods prices excluding autos posted their largest monthly gain since the series began in 1988, led by computers, peripherals, and semiconductors. Critically, there is little evidence that foreign exporters are absorbing tariff costs by cutting pre-tariff prices, meaning U.S. importers are bearing the full burden of both tariffs and supply-driven price increases.
Federal Reserve Policy & Inflation Risk
- Markets execute a full 180 on the Fed. Swap contracts no longer price any easing in 2026 and assign a greater than 50% probability of a rate hike. This is a dramatic reversal from the start of the year, when two to three cuts remained the consensus. TD Securities noted the shift succinctly: Participants have gone from debating when the next cut arrives to pricing hikes. The last time the Fed raised rates was July 2023. That re-pricing proved short-lived: as Fed Chair Powell on Monday said longer-term inflation expectations remain well-anchored and the Fed can afford to wait, prompting traders to erase hike wagers and resume pricing a potential cut by year-end.
- The 1970s analogy is getting louder – and the risks are real. The Financial Times’ John Plender draws a direct line from Arthur Burns’s refusal to respond to the 1973 oil shock to the current dilemma: treat the supply shock as “transitory” and risk de-anchored expectations, or tighten into weakening growth, risking recession. The parallel extends to political pressure: Burns was intimidated by Nixon; Trump has vocally demanded rate cuts. Key differences today: the economy is less energy-intensive, labor bargaining power is weaker, and central banks are nominally independent.
- A long-war scenario would materially worsen the inflation problem. Bloomberg Intelligence says that if the Iran war lasts 18 months or longer and pushes crude above $150, the Treasury curve would likely flatten further, led by higher short-term inflation breakevens, and CPI could climb toward 8%.
Treasury Yields & Bond Markets
- Yields surged through most of the week, then reversed sharply as the market pivoted from inflation fear to growth risk. The 10-year hit 4.43% by Friday's close, with the 30-year reaching 4.96%. Yet, the 2-year fell on Friday and the move accelerated Monday as yields posted their largest single-day decline since August 2025. The 10-year is now at 4.35%, the 2-year at 3.83%, and the 30-year at 4.91%. The shift suggests the front end is now pricing growth and risk-asset damage rather than each incremental move in oil.
- Rising yields are no longer just a U.S. story. The 10-year German Bund is at its highest since 2011, and UK 10-year yields are back above 5%, reinforcing that this has become a broad inflation and duration event rather than a single-country move.
Commodities & Market Dynamics
- Hormuz is not just an oil story. The strait is a choke point for fertilizer, LNG, sulphur, and helium, not just crude. Helium matters because it is essential to semiconductors, which means the war can hit the tech complex through a physical-input channel, not just through rates.
- The macro regime is shifting toward “molecules matter.” The FT’s Gillian Tett argues the conflict is rewarding capital-intensive, asset-heavy businesses and exposing the fragility of capital-light models that still depend on industrial inputs, power, and logistics. That is relevant for AI, which cannot scale without data centers, semiconductors, transformers, and power infrastructure.
- Markets still look risk-off overall, even if individual hedges behave unevenly. On Friday, the S&P 500 fell 1.7%, the Nasdaq 100 moved into correction territory, Brent topped $112, and the Bloomberg Dollar Spot Index rose 0.2%. Gold rebounded that day, but the broader message is that investors are favoring liquidity and the dollar over any single classic haven.
CRE Finance Market Implications
- All-in CRE mortgage coupons remain elevated, but Monday’s rally argues for slightly less conviction on an immediate march higher. With the 10-year back to roughly 4.35% after Friday’s 4.43% close, fixed-rate CRE benchmarks are still materially worse than a month ago, even if the market may be nearing an inflection point as growth concerns reassert themselves.
- The oil shock hits CRE through at least three channels. First, construction input costs: energy-intensive materials (steel, concrete, asphalt, chemicals) face direct price pressure, compounding existing tariff-driven cost increases. Second, operating expenses: properties with significant energy footprints (industrial, data centers, large-format retail) face margin compression. Third, and most important, the inflation-to-rates channel: if the March CPI prints at 3.4% y/y and the Fed signals willingness to hike, the rate environment for CRE transactions deteriorates further.
- Credit-market stress remains contained but bears watching. Private credit defaults at 2.5% and improving BDC distress metrics suggest no systemic crack, but the “equitification” of public credit – tighter correlation with equity risk sentiment and growing tech concentration – means a sustained equity selloff could spill over into CMBS and CRE CLO spreads faster than in prior cycles. Bank regulatory loosening may expand eventually into CRE lending capacity, particularly if changes in mortgage servicing capital treatment draw banks back into real estate credit. Near term, though, growth-inflation uncertainty is the binding constraint on new origination.
Sources: Bloomberg, Financial Times, Wall Street Journal, Federal Reserve, University of Michigan, BLS, S&P Global PMI, TD Securities.
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Contact Raj Aidasani (raidasani@crefc.org) with any questions.