MW $120-a-barrel oil may be a tipping point that shifts Fed's focus from high inflation to recession threat

By Christine Idzelis

U.S.-traded crude was at around $93 a barrel on Thursday

Investors are monitoring developments in the Iran conflict after the U.S. out forward a cease-fire plan.

U.S. stocks were heading lower on Thursday, as uncertainty surrounding when the fighting in the Middle East might ultimately end was still hanging over the market.

Iran has reportedly rejected the U.S. cease-fire proposal, and oil prices were moving higher, reversing some of a decline from earlier in the week.

One of the biggest questions for investors right now is how long the oil-price shock sparked by the Iran conflict will last. A sustained price spike risks reviving inflation and potentially pressuring the Federal Reserve to shift to hiking interest rates for the first time since 2023.

But just as important for what high oil prices might mean for inflation is how they could hurt economic growth. Investors have been trying to game out the tipping point at which the energy-price shock starts to have a bigger impact on unemployment and the economy.

A jump to $120 a barrel would probably cause "demand destruction" in the economy, with consumers pulling back on spending due to resulting inflation at the gas pump and in areas like food as transportation costs rise, said Stephanie Link, chief investment strategist and portfolio manager at wealth-management firm Hightower, in a phone interview.

BofA Global Research, in a note shared with MarketWatch, dug into the ramifications of high oil prices. If crude prices hold around their current levels, the economic impact will likely be higher inflation that could prompt rate hikes, warned Aditya Bhave, a U.S. economist at BofA, in the note.

West Texas Intermediate crude oil futures (CL00) were trading around $93 a barrel on Thursday morning.

But an even larger price spike in oil would risk tipping the U.S. into recession and harming the labor market.

The BofA chart below shows that, initially, higher oil prices will result in a boost to inflation. But over time, if they continue to climb, the risks will shift, making it more likely that the Fed cuts rates to support a struggling economy as inflation subsides on demand destruction.

BOFA GLOBAL RSEARCH

To be sure, if the Iran conflict is "resolved in short order, oil prices could fall significantly," allowing the Fed to "reinstate its dovish bias," Bhave said.

But under a more dismal scenario involving a "very large" oil shock, the "Fed will likely turn even more dovish due to labor market concerns," Bhave wrote, meaning it would deliver deeper rate cuts to support the economy.

Wars, recession and unexpected rate hikes are historically factors leading to large drops for the S&P 500 SPX, generating worry even among optimistic investors.

Before the U.S. and Israel bombarded Iran at the end of February, many investors had been expecting the U.S. economy to pick up in early 2026 due in part to President Donald Trump's One Big Beautiful Bill Act. Earlier this month, though, the Bureau of Economic Analysis estimated that real domestic product in the fourth quarter rose at an annual rate of 0.7%, slower than expected as a protracted government shutdown hurt the economy.

The Atlanta Fed's GDPNow tracker estimated as recently as Monday that real GDP in the U.S. was on track to grow 2% in the first quarter.

White House press secretary Karoline Leavitt said Wednesday that the U.S. is "very close to meeting the core objectives of Operation Epic Fury, and this military mission continues unabated."

"From the outset," she said, Trump and the Pentagon "estimated it would take approximately four to six weeks to achieve this critical mission." Now, she continued, "25 days in, the greatest military the world has ever known is ahead of schedule and performing exceptionally day by day."

The U.S. stock market was trading mostly lower on Thursday, with the S&P 500 SPX falling 0.8%, the Nasdaq Composite COMP dropping 1.1% and the Dow Jones Industrial Average DJIA slipping 0.3%, according to FactSet data, at last check. All three benchmarks are down this year, after big losses this month.

Victor Reklaitis contributed.

-Christine Idzelis

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March 26, 2026 11:43 ET (15:43 GMT)

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