The Fed will almost certainly hold rates steady, but fresh economic projections and other communications due out tomorrow afternoon will show how the central bank is absorbing two uncomfortable realities at once.

Why it matters: The energy shock from the Iran war adds a new factor to the Fed's complicated calculus. Inflation is running hotter than expected, even before the war's impact materializes in the data. Labor market data has been grim, and it's unclear how a sustained oil shock could weigh more heavily on the economy.

• Whatever the projections show will set the table for Fed chair Jerome Powell's successor, Kevin Warsh.

What they're saying: "The new dot plot likely will indicate that most members retain a bias to ease policy this year and in 2027," Sam Tombs, chief U.S. economist at Pantheon Macro, wrote in a client note.

• But Tombs cautioned that "the biggest risk to markets" is if new projections show the median Fed official now expects rates to stay on hold through year-end.

Flashback: The Fed will release the Summary of Economic Projections, including estimates of how interest rates will evolve, for the first time this year.

• In December, the median Fed official anticipated one rate cut in 2026, though four officials anticipated two cuts, while another three envisioned deeper cuts this year.

The big picture: The central question is how those projections have evolved in the months since, with uncomfortably hot inflation readings alongside mixed evidence on whether the labor market is stabilizing as Powell suggested after the January Fed meeting.

• The Personal Consumption Expenditures Price Index, excluding food and energy prices, rose 3.1% in January from a year earlier. That's an acceleration from November, when the core index rose at a 2.8% annual pace.
• It's unclear whether the "low-hire, low-fire" labor market dynamic remains intact. February data suggested that there was, on net, no hiring at all last month or in December.
• The unemployment rate was 4.4% in February, a tick below the most recent peak. But the January job surge now looks like the outlier, with the economy returning to job-shedding mode last month.

What to watch: Now comes the war's economic shocks. It puts the Fed — and other major central banks, also making policy decisions this week — in a tricky position.

• Policymakers have to determine whether to "look through" this decade's latest supply shock or stand pat on interest rates to stave off further inflationary effects.

The price of diesel fuel has surged above $5 a gallon in the U.S., the highest in four years, creating new inflationary pressure on anything Americans buy that relies on truck transport — which is to say, pretty much everything.

Driving the news: The average retail price of a gallon of diesel is $5.04 today, AAA says, up from $3.65 a month ago.

• That amounts to a 38% one-month rise in the price of diesel, surpassing even the 30% rise in the price of regular unleaded gasoline over that span.
• The Iran war has choked off supplies of crude oil and other commodities from the Persian Gulf, driving up global prices.

State of play: Most Americans have little direct exposure to diesel prices; gasoline-fueled (and, increasingly, electric or hybrid) cars are the norm.

• Many houses, especially in the Northeast, rely on heating oil, a close chemical cousin of diesel. Thankfully, spring is arriving.
• The indirect effects of higher diesel prices, however, are enormous, flowing through to essentially all goods, at a time when supply chains are already stressed by higher tariffs.
• Tractor-trailers, trains and many ships rely on the fuel, so the price of bringing virtually all goods to market has risen markedly in the space of a few weeks.

Between the lines: That isn't likely to result in immediate price increases, but will shape the pricing decisions companies make in the weeks ahead — especially for heavy, bulky and inexpensive goods for which transportation is a large share of their total cost.

• That means that higher diesel prices could thus drive core inflation measures higher, not just the headline measures that include the direct cost of higher energy.
• The Fed will have a harder time looking through those price hikes if they show up in core goods, as opposed to just in retail gasoline or electricity prices.