Fed Minutes Show Officials Saw Two-Sided Risks From Iran War
A growing number of Federal Reserve officials worried the Iran war could further stoke inflation and wanted to make clear following their March meeting that the central bank may have to consider raising interest rates.
Minutes of the Federal Open Market Committee’s March 17-18 meeting, released Wednesday in Washington, showed policymakers wrestled with starkly differing scenarios for the US economy following the outbreak of the Iran war, and the policy reactions that might follow.
Most officials worried a protracted war could hurt the labor market and warrant lower interest rates. At the same time, many policymakers highlighted the risk to inflation that might ultimately warrant rate increases.
Officials in the latter camp appeared to become more strident, urging their colleagues to consider adding language to their post-meeting statement that raised the scenario of hiking rates under certain conditions.
“Some participants judged that there was a strong case for a two-sided description of the committee’s future interest-rate decisions in the post-meeting statement, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation were to remain at above-target levels,” the minutes said.
Echoing those concerns, the minutes noted the “vast majority” of officials thought it may take longer to return inflation to the Fed’s 2% goal.
At the meeting, officials held the Fed’s benchmark policy rate in a range of 3.5% to 3.75% at that gathering.
War Fallout
The gathering occurred almost three weeks after war in the Middle East caused global energy costs to begin surging, putting upward pressure on inflation but also threatening to dampen economic growth. Several policymakers have since signaled a desire to hold rates steady as they gauge the war’s fallout.
Overall, policymakers reacted to the war by expressing concerns about both sides of their mandate.
“The vast majority of participants judged that upside risks to inflation and downside risks to employment were elevated, and the majority of participants noted that these risks had increased with developments in the Middle East,” the minutes said.
In projections released after the meeting, policymakers signaled an expectation for one interest-rate cut in 2026, unchanged from their December forecasts. Investors are skeptical the Fed will cut at all this year, according to federal funds futures markets.
Most officials said they expected the unemployment rate to remain little changed, though the majority agreed that risks to the labor market were skewed to the downside.
“In particular, many participants cautioned that, in the current situation of low rates of net job creation, labor market conditions appeared vulnerable to adverse shocks,” the minutes said.
At the same time, policymakers noted that prolonged conflict in the Middle East would likely lead to more persistent increases in energy prices, which could, in turn, push up underlying inflation.
Some officials also highlighted the possibility that, with inflation already running above target for five years, “longer-term inflation expectations could become more sensitive to energy price increases.”
Source : Bloomberg.com
