【Iran Crisis】Federal Reserve Officials Say War Adds New Uncertainty to Monetary Policy Decisions; Energy Price Outlook Becomes a Key Factor

The United States and Israel launching strikes against Iran add new uncertainties for Federal Reserve policymakers, officials say. The most critical issue is how long energy prices may stay elevated.

Neel Kashkari, President of the Minneapolis Federal Reserve Bank, said it is still too early to judge the impact and duration of these events on inflation. He previously expected one rate cut this year but now says he is less certain about that forecast, stating, “Given the current geopolitical events, more data is needed.”

John Williams, President of the New York Federal Reserve Bank, said the impact on financial markets is “relatively mild” so far, with oil prices rising but not “dramatically.” When asked about the potential impact of the war on U.S. inflation, he said it depends on how long the situation persists.

Williams noted that rising oil prices could have a more profound effect on Europe and may spill over into the global economy.

“The key question is, quantitatively, how significant is this impact on the U.S., and how long will it affect price stability?”

Additionally, Williams said if inflation continues to slow after most of the tariff effects have passed, further rate cuts may be necessary. “If inflation develops as I expect, it will eventually be necessary to lower the federal funds rate further to prevent monetary policy from becoming inadvertently more restrictive,” he added. He expects tariffs to have some additional impact on consumer prices in the first half of the year, with inflation falling to 2.5% by the end of the year and to 2% in 2027.

Meanwhile, Williams stated that encouraging signs of stabilization have appeared in the labor market over the past few months. Driven by “solid” growth, unemployment is expected to continue to decline slightly over the next year or two. He projects this year’s economic growth at 2.5%.

He said that, given the lack of a second-round effect and well-anchored inflation expectations, tariffs’ impact on prices is expected to be mainly one-time, with the peak effect of tariffs passing “later this year.”