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KPMG Warns Fed May Raise Rates in H2 as Iran War Fuels Stagflation

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KPMG chief economist Diane Swonk has warned that the Federal Reserve may be forced to raise interest rates in the second half of 2026, as the war with Iran deepens stagflation risk across the global economy. The warning comes after the Fed held rates steady at its March meeting while acknowledging heightened uncertainty from Middle East developments, with Swonk arguing that entrenched stagflation could ultimately require a deep recession to resolve.

Why KPMG Expects the Fed Could Raise Rates in the Second Half

The Federal Reserve kept the federal funds target range unchanged at 3.50%-3.75% at its March 18, 2026 meeting, citing uncertain implications from developments in the Middle East. The decision marked a pause in what had been an easing cycle, as policymakers weighed conflicting signals from inflation and growth.

3.50%-3.75%
Fed target range on March 18, 2026.

The Fed’s Summary of Economic Projections from the same meeting showed a median federal funds rate of 3.4% for end-2026, below the 2025 year-end actual midpoint of 3.6%. That implies one 25-basis-point cut this year remains the official baseline, not a hike.

However, Swonk wrote after the March FOMC meeting that FOMC participants had shifted risks toward weaker growth and higher inflation and unemployment, a combination she described as suggesting fear of stagflation. In that same analysis, Swonk noted that “a potential rate hike was raised again by some participants at this meeting,” framing hikes as a risk under active discussion rather than the Fed’s expected path.

“A potential rate hike was raised again by some participants at this meeting.”

Diane Swonk, KPMG Chief Economist, March 2026 FOMC Analysis

The distinction matters. The official median projection still points to easing, but the range of outcomes discussed inside the Fed now explicitly includes tightening. If inflation reaccelerates while growth weakens, the committee could face a scenario where holding steady is no longer sufficient.

According to unconfirmed reports from secondary syndication, Swonk went further in separate commentary, warning that the Fed may be forced to raise rates in the second half of the year if stagflation pressures intensify. That specific framing could not be independently verified against primary KPMG sources, and it represents a risk scenario rather than an established baseline.

How the Iran War Raises the Global Risk of Stagflation

Stagflation occurs when an economy experiences rising inflation alongside stagnant or declining growth, a combination that leaves central banks with no clean policy options. Raising rates fights inflation but deepens economic weakness; cutting rates supports growth but risks further price acceleration.

The war with Iran has introduced exactly this kind of policy dilemma. Energy supply disruptions have pushed Brent crude to $108 per barrel, creating cost-push inflation that feeds through to transportation, manufacturing, and consumer goods. Unlike demand-driven inflation, supply-shock inflation cannot be easily resolved by cooling economic activity.

The geopolitical shock has already reshaped market expectations. Before the Iran war, markets had priced in 55 basis points of easing for 2026. By March 16, that figure had collapsed to just 24 basis points, reflecting a dramatic repricing as investors absorbed the inflationary impact of the conflict. The shift in rate cut expectations underscores how quickly geopolitical events can overturn monetary policy assumptions.

The effects extend well beyond U.S. borders. Energy-importing economies across Europe and Asia face the same inflation pressure, while trade disruption and elevated uncertainty weigh on global demand. For central banks worldwide, the conflict narrows the range of viable policy responses.

Why a Deep Recession May Be the Only Exit Once Stagflation Takes Hold

According to a single unconfirmed source, Swonk warned that once stagflation takes hold, a “deep recession” may be the only way out. While the exact wording could not be directly verified against primary KPMG publications, the underlying economic logic is well established.

When inflation becomes embedded in expectations and wage-price dynamics during a period of weak growth, central banks face an asymmetric choice. Tolerating inflation erodes purchasing power and destabilizes long-term planning. Fighting it with rate hikes deliberately slows an already weakening economy, potentially triggering the very recession policymakers want to avoid.

The 1970s stagflation episode remains the most relevant historical precedent. Then-Fed Chair Paul Volcker ultimately raised the federal funds rate above 20% to break inflation, precipitating back-to-back recessions in 1980 and 1981-1982. The lesson from that era is that delayed action on inflation tends to make the eventual correction more painful.

Today’s Fed faces a less extreme but structurally similar dilemma. The March projections still show one cut as the median path, but the discussion of potential hikes within the FOMC signals that policymakers are preparing for scenarios where easing is no longer appropriate. If energy prices remain elevated and inflation expectations begin to drift upward, the window for a soft landing narrows considerably.

The tradeoff between price stability and employment is particularly painful in a stagflationary environment. Normally, the Fed can support both sides of its dual mandate simultaneously. Stagflation forces a choice, and historically, central banks have prioritized inflation control even at the cost of higher unemployment and slower growth.

What Higher Rates and Stagflation Could Mean for Bitcoin and Risk Assets

If the Fed shifts from cutting to holding, or from holding to hiking, the implications for risk assets are significant. Higher interest rates increase the opportunity cost of holding non-yielding assets like Bitcoin and reduce the liquidity that has historically supported speculative markets.

The sharp repricing from 55 to 24 basis points of expected easing already reflects tightening financial conditions in practice, even without a single rate hike. As BTC funding rates have recently turned positive, crypto markets have shown sensitivity to shifting macro expectations. Reduced liquidity expectations tend to compress valuations across both traditional and digital asset markets.

Stagflation presents a more nuanced picture for Bitcoin specifically. Some market participants view Bitcoin as an inflation hedge, similar to gold, which could support demand during periods of rising prices. However, the asset’s historical correlation with risk-on sentiment suggests it is more likely to trade as a speculative asset during periods of genuine economic stress.

The practical transmission channel is straightforward. Higher rates strengthen the dollar, raise borrowing costs, and reduce the pool of capital flowing into speculative investments. For crypto markets, which expanded dramatically during the low-rate environment of 2020-2021, a sustained reversal in monetary policy would represent a meaningful headwind.

Institutional participation in crypto markets, including through new token launch events and structured products, adds another dimension. Institutional allocators are more rate-sensitive than retail participants, and a hawkish policy shift could slow the pace of institutional inflows that have supported prices in recent quarters.

FAQ: Fed Rate Hikes, Stagflation, and Recession Fears

What is stagflation?

Stagflation is an economic condition where inflation remains persistently high while economic growth stalls or declines and unemployment rises. It is considered one of the most difficult scenarios for central banks because the standard tools for fighting inflation, primarily interest rate increases, also suppress growth.

Why would the Fed raise rates during weak growth?

If inflation becomes entrenched and begins feeding into long-term expectations, the Fed may determine that the cost of allowing prices to spiral outweighs the short-term damage from higher rates. The March 2026 FOMC discussion explicitly included rate hikes as a scenario under consideration, even as the baseline projection still pointed to one cut.

How could the Iran war affect inflation and markets?

The conflict has disrupted energy supply chains, pushing Brent crude to $108 per barrel and creating cost-push inflation across the global economy. This type of supply-driven inflation is harder for central banks to control because it originates from external shocks rather than domestic demand. For financial markets, the combination of higher energy costs, reduced growth expectations, and policy uncertainty typically increases volatility and pressures risk assets.

Is a rate hike in the second half of 2026 the Fed’s baseline expectation?

No. The Fed’s March 2026 Summary of Economic Projections showed a median federal funds rate of 3.4% for year-end 2026, which implies one 25-basis-point cut from the current 3.50%-3.75% range. A rate hike is a risk scenario discussed by some participants, not the committee’s central forecast.

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Cryptocurrency and digital asset markets carry significant risk. Always do your own research before making decisions.

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Haruto Nakamura

03 April 2026, 15:12:40 GMT +0000

Digital marketing pro 🚀 | Crafting content that connects Coincu.com | Educating on crypto trends, market moves, and meme coins 🥳 | Japan to the moon 🌙 #CryptoEducator #MarketMaker #Coincu

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