Federal Reserve's Kashkari: Iran War Clouds Loom Over Monetary Policy Outlook

Minneapolis Fed President Kashkari said Tuesday that the escalation of the Iran conflict has increased uncertainty about the U.S. economic outlook, making the direction of the central bank’s interest rate policy more difficult to predict.

This official, who has voting rights on the Federal Open Market Committee (FOMC) this year, stated that before the U.S. and Israel launched a joint strike against Iran, “I was still confident in the economic outlook.”

Kashkari said he initially expected that by 2026, as inflation pressures gradually eased, the Federal Reserve would have room to cut rates. But now, facing this new shock, policymakers must observe its duration and impact. “We need to judge how long this shock will last and how significant its effects will be.”

“I believe that, whether it’s us or the markets, everyone is weighing the same question: How long will this conflict last? How bad will the situation get? Is it more like a prolonged attrition war like Russia-Ukraine, or a short-term intense event like Hamas attacking Israel? Different scenarios have different implications for monetary policy.”

He pointed out that such geopolitical conflicts are often difficult to predict in terms of their impact on inflation, so more economic data is needed to assess the situation.

Last year, the Fed cut the federal funds rate target range by 75 basis points to 3.5%-3.75% to support a gradually slowing labor market amid inflation still above the 2% target.

Although Fed officials have been relatively cautious about forward guidance this year, markets generally expected rate cuts to begin in 2026. However, with rising oil prices threatening the previous inflation slowdown, markets have started to reduce expectations for rate cuts. Still, if it turns out that the Trump administration’s military actions significantly slow economic activity, expectations for rate cuts could rise again.

Kashkari also said that the Fed usually pays more attention to “core inflation” and other potential price signals to judge future trends, but the current environment might be different.

“If, after five years of high inflation, overall inflation remains elevated for a long time, that would be a scenario we need to pay close attention to,” he emphasized, noting the need to be cautious about its impact on inflation expectations.

Before launching strikes against Iran, Kashkari believed the U.S. economic outlook was relatively optimistic. He said inflation was expected to continue declining, the labor market was “generally good,” but signs of slowdown were emerging.

“I thought at the time that policy was in a fairly appropriate position, and we had the conditions to gradually and smoothly bring the policy rate back to a neutral level,” he said, while also acknowledging that the current situation has added new uncertainties.

Additionally, Kashkari expressed his hope to establish a productive working relationship with Kevin Woor, who has been nominated to succeed current Chair Powell, whose term ends in May.

Kashkari said he is willing to discuss the former’s previous criticisms of the Fed, including his views on managing the large balance sheet and the interest rate control system.

He also stated that if Powell continues to serve as a board member after his term as Chair ends, “that would be very welcome.” Powell’s board term can last until 2028. Many believe that if he chooses to stay, it will help maintain the Fed’s independence amid pressure from the Trump administration.

(Source: Caixin)