PARIS / WASHINGTON — Global economic growth is on track to slow sharply this year as the conflict between the United States and Iran disrupts energy markets and rattles investment confidence across the world. Two major developments in the past week have crystallized the mounting pressure: the Organisation for Economic Cooperation and Development has slashed its growth forecasts, and the Federal Reserve has opted to hold interest rates steady, signaling that the battle against inflation is far from over.
The OECD delivered its starkest warning yet on Wednesday, cutting its global growth projection to 2.8% for 2026 — down from 3.4% in 2025 — as the ongoing U.S.-Iran confrontation disrupts the Strait of Hormuz, sends energy prices higher, and weighs on business investment worldwide. The Paris-based organization outlined two scenarios. In the base case, growth recovers to 3.1% in 2027 if a peace agreement is reached and energy disruptions ease by mid-year. But if the Strait remains disrupted into 2027, the OECD’s models show growth cratering to just 2.1% this year and 1.8% in 2027 — a trajectory that would push a number of economies into or close to recession.
“The longer the disruptions last, the larger the economic and social costs become,” said Stefano Scarpetta, the OECD’s chief economist. The crisis has exposed the vulnerability of the global economy to a single chokepoint. Roughly a fifth of the world’s oil and a third of its liquefied natural gas pass through the Strait of Hormuz, making any sustained disruption catastrophic for energy importers in Asia and Europe alike. India is already rationing gas. Japan and South Korea, with strategic reserves to draw on, can withstand a temporary squeeze — but the longer the disruption runs, the thinner those buffers grow.
The inflation consequences are equally troubling. Under the prolonged-disruption scenario, global inflation would rise by 0.4 percentage points in 2026 and a further 1.3 points in 2027. Unemployment would climb, investment would weaken — including in energy-intensive artificial intelligence infrastructure — and financial markets would face repricing risks as commodity prices stay elevated while consumer demand softens. The OECD identified AI as the one bright spot in its outlook, noting that continued investment from major technology firms could add 0.4% to GDP per capita growth across G20 economies, and 0.9% in the United States alone. But even that silver lining depends on energy prices normalizing — a condition that remains entirely contingent on the conflict’s resolution.
Central banks are caught in a difficult position. Weaker growth calls for lower rates, but elevated inflation argues for keeping them high. The Federal Reserve’s response, delivered at its June meeting, was to hold the benchmark rate at 3.50% to 3.75% for the second consecutive meeting — a decision that reflects both the strength of the U.S. economy and the stubbornness of inflation pressures.
The FOMC voted 10-2 in favor of the hold, with two members favoring an immediate cut. The median projection now shows only one 25-basis-point reduction for the remainder of 2026 — a far cry from the multiple cuts markets had been pricing in at the start of the year. Core Personal Consumption Expenditures inflation, the Fed’s preferred gauge, stood at 3.10% in January 2026, ticking up from 3.0% in December 2025. Chair Jerome Powell, speaking after the decision, described the path ahead as “highly uncertain and, in fact, unknowable” — a notable acknowledgment from a central banker who typically favors measured, forward-looking language.
Powell was clear that any future cuts would come from risk management rather than a reactive response to deteriorating employment data. That framing suggests the Fed is not eager to ease quickly, even as growth concerns mount globally. The message from Washington aligns with what the OECD is seeing abroad: the room for maneuver is narrowing, and the cost of getting policy wrong in either direction is rising.
For emerging economies, the double exposure is most acute. Countries with limited energy reserves, high food and energy shares in household spending, fragile currencies, and weak social safety nets face the steepest costs. The OECD warned that developing economies could face a compounding shock — higher import bills for energy, weaker demand for their exports, and currency pressure that forces painful policy choices between supporting growth and defending their currencies.
Goldman Sachs has already pushed its first projected U.S. rate cut to the fourth quarter of 2026. Morgan Stanley holds to a September expectation, though that view is increasingly under pressure. The divergence between street forecasts and the Fed’s own median projection underscores how uncertain the landscape has become. Markets that once anticipated a swift pivot to easier monetary policy are being forced to reckon with an institution that appears willing to hold rates high even as global growth cools.
What happens next depends almost entirely on events in the Middle East. A durable ceasefire and the reopening of the Strait of Hormuz would begin the process of normalizing energy markets, easing inflation, and restoring business confidence. Without that, the OECD’s darker scenario — 2.1% global growth, 1.8% in 2027 — moves from tail risk to base case. Central banks on both sides of the Atlantic will be watching energy prices and consumer sentiment data closely in the coming weeks, looking for any signal that the pressure is easing or building.
For now, the global economy is navigating a rare combination: growth slowing, inflation elevated, and a geopolitical shock that few models adequately anticipated. The OECD’s warning is as clear as its data allows. The Fed’s caution reflects the same underlying anxiety. The only question that matters now is how long the Strait stays open.