Federal Reserve Voting Member: War Shadows Loom Over Economic Outlook, the Fed Can Hold Steady

According to The Wall Street Journal, a well-known journalist nicknamed the “New Federal Reserve News Agency,” Nick Timiraos reports that Minneapolis Fed President Neel Kashkari stated that if inflation cools down, it might be appropriate to cut interest rates once or twice later this year. However, the Middle East war could create a situation that supports a longer pause in rate hikes.

Kashkari reiterated in an interview with The Wall Street Journal on Monday that he believes the current interest rate range of 3.5% to 3.75% is close to a “neutral level,” meaning it neither stimulates nor restrains the economy. He said that before the latest wave of conflicts, inflation was gradually declining, so the economy did not need to maintain restrictive interest rate policies. Prior to the Iran incident, the situation seemed to be moving gently in the right direction. Meanwhile, the labor market remains steady but slightly soft, not a source of inflationary pressure.

Kashkari pointed out that war could complicate this situation, but it is too early to judge the impact. He compared the current situation to the Russia-Ukraine conflict in 2022. That conflict triggered a global commodity shock and indicated that such shocks could last longer than expected:

At that time, I was on the temporary side. It was indeed temporary, just more severe and longer-lasting than we anticipated. Do we really want to go through another temporary 2.0?

Timiraos notes in the article that after three rate cuts last year, the Federal Reserve held steady at the January meeting. The general expectation is that the Fed will maintain this stance at the March 17-18 meeting. The steady labor market and the desire to see more progress on inflation make a rate cut before summer unlikely. The Iran war adds another reason to wait.

Kashkari has voting rights on the Federal Open Market Committee (FOMC) this year. He said that rising oil prices could create conflicting pressures: higher energy costs might increase inflation and support tighter policies; but if the shock undermines confidence and spending, it could support looser policies. Given the difficulty in weighing these two effects, it may be more reasonable to hold steady for now.

Kashkari also mentioned that in his December quarterly economic forecast, he expected one rate cut this year. He believes that the Fed maintaining a so-called “dovish tilt” — implying that the next move is more likely to be a rate cut than a hike — is reasonable. “I have no problem with that, but developments in Iran and their impact on oil prices and other commodities could, to some extent, overturn this view.”

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