Will the US-Iran conflict become the "interest rate cut dream" that kills the market? The Fed's second-in-command once again pours cold water on it...

Ask AI · Why does the U.S.-Iran conflict make the Federal Reserve more cautious about interest rate cuts?

Cailian Press March 27 (Editor Huang Junzhi) Late Thursday evening, Philip Jefferson, a Federal Reserve Governor and Deputy Chair for Supervision, said he expects the U.S.-Iran war to push inflation higher in the short term, and that monetary policy “has been prepared to handle a wide range of economic outcomes.”

That day, during a speech in Dallas, he stated: “At least in the short term, I expect overall inflation to rise, reflecting the increase in energy prices caused by the conflict in the Middle East.”

“Looking ahead, I believe our current policy stance allows us to better determine the magnitude and timing of further adjustments to the policy rate.” he added.

Jefferson is closely monitoring the situation in the Middle East and the global energy markets, but he emphasized that it is still too early to judge how the economy will be affected. He highlighted that the impact of the Middle East conflict largely depends on how long energy prices remain elevated: brief turbulence is unlikely to have effects on the economy beyond one or two quarters, but sustained high oil prices could have significant impacts.

Similarly, Federal Reserve Governor Michael Barr also noted that evening that recent shocks—from surges in oil prices to tariffs—have complicated the Fed’s efforts to bring inflation down to its 2% target.

He also believes that if the conflict ends quickly, the impact on inflation and the economy could be limited; however, if the conflict persists, it could have broader effects on both. Barr expressed concern that inflation has been above the Federal Reserve’s target for five consecutive years, and worries that if oil prices continue to surge, it could push up long-term inflation expectations.

“Given the considerable uncertainty about how developments in the Middle East might affect our economy, and the other factors I mentioned, it’s reasonable to take some time to assess the situation. Our current policy stance positions us well to maintain stability.” he added.

Inflation Impact

Jefferson also stated that, so far, the impact of rising oil prices on inflation should be relatively small, even though consumers are currently seeing higher gasoline prices at the pump. He is closely watching whether these increased costs will be reflected across the broader economy’s price system.

Meanwhile, the longer energy prices stay high, the more households will need to weigh their options. Jefferson warned that households relying on oil and natural gas for commuting, schooling, and heating may have to cut back on discretionary spending. This could lead to reduced spending at restaurants or retail stores, and potentially increase household debt levels.

He also pointed out that ongoing uncertainty regarding tariff policies and recent energy price surges create a more complex economic environment for the Federal Reserve as it seeks to combat inflation and maintain full employment.

Before the outbreak of the Iran conflict, U.S. inflation had already been above the Fed’s 2% target for five consecutive years, and over the past year, progress in lowering inflation appeared to have stalled. Jefferson mainly attributed this to tariffs, but also noted that, aside from housing, inflation in the service sector has remained relatively steady over the past year. However, strong productivity growth and deregulation have somewhat offset these effects.

Labor Market

Additionally, Jefferson said the labor market is “roughly balanced,” but the risks are “tilted downward.” He expects the unemployment rate to remain around its current level of approximately 4.4% this year, but overall job growth may still be relatively modest. When assessing the health of the labor market, he will pay close attention to the pace and composition of new employment.

However, he believes the pace of economic expansion remains about the same as last year or slightly faster, but also acknowledged significant uncertainty about the outlook.

“Currently, economic uncertainty is quite high, with rising energy prices and escalating Middle East tensions adding to that. But I still believe our current policy stance is appropriate and allows us to evaluate where the economy is headed,” he added.

(Cailian Press, Huang Junzhi)