Federal Reserve Officials Warn: Iran War Poses 'Greater Risk' to Inflation

On March 27, three Federal Reserve officials expressed growing concerns about the impact of the Middle East war on the U.S. economic outlook. One policymaker indicated that the surge in oil prices has shifted the balance of risks, making inflation a greater concern than employment. Federal Reserve Governor Lisa Cook stated during a speech in New Haven, Connecticut, that “I believe the risk of inflation is now greater due to the Iran war. In terms of the labor market, I think it is in a balanced state, but that balance is fragile.” Cook did not disclose how she believes policymakers should respond, but her two colleagues indicated in their remarks on Thursday that they prefer to keep interest rates unchanged while assessing the war’s impact on inflation and growth. Federal Reserve Governor Michael Barr mentioned at an event in Washington, “It is reasonable to take some time to assess the situation. Our current policy stance puts us in a favorable position to maintain stability while evaluating new data.” Federal Reserve Governor Stephen Miran stated at an event in Miami that he still believes the underlying inflation rate will trend towards 2% over the next 12 months. Miran also noted that the Federal Reserve could potentially reduce its balance sheet by $1-2 trillion without causing turmoil in financial markets. However, he warned that many accompanying measures would be needed, and this process could take years. “Once this process starts, I suggest proceeding with a slow pace to ensure the private sector can absorb all the securities we are shedding from our balance sheet. I am excited about the possibility, but if it does happen or once it happens, I expect progress to be slow.”