"New Federal Reserve News Agency": Whether or not a ceasefire agreement is reached, the prospects for the Federal Reserve to cut interest rates remain bleak.

Byline: He Hao

Source: Wall Street News

On Wednesday, Nick Timiraos, a well-known financial reporter dubbed the “New Fed Communications News,” wrote that the ceasefire between the United States and Iran offers an opportunity to ease the latest serious threat the global economy is currently facing. But for the Federal Reserve, this may amount to simply swapping one problem for another: an energy shock with a duration just long enough to push up inflation, yet not long enough to severely disrupt demand, so that interest rates remain unchanged for a long time.

Timiraos cited the Federal Reserve meeting minutes for March 17–18, released on Wednesday, saying:

The minutes emphasized that the Iran war did not make the Fed less willing to cut rates; rather, it made an already cautious stance even more complex. Before the conflict with Iran erupted, the path for rate cuts had already narrowed. The U.S. labor market had stabilized enough to alleviate recession concerns, while progress toward bringing inflation back down to the Fed’s 2% target had stalled.

The March meeting minutes said that, in part due to the risks of a prolonged war, the vast majority of participants pointed out that progress in bringing inflation back down to target may be slower than previously expected, and they believed the risk of inflation remaining above the Committee’s target had increased.

At the March FOMC meeting, the Federal Reserve kept the benchmark interest rate unchanged in the range of 3.5% to 3.75%, which was the second pause after three consecutive rate cuts in the final few months of 2025.

Timiraos said that if the risk that the Iran conflict might expand and weigh on economic growth—pushing the economy into recession—were the last and strongest reason to resume rate cuts, then the irony is that the end of the war could actually make it harder for the Fed to loosen policy in the short term:

That is because the ceasefire eliminates the worst-case scenario—severe price surges disrupting supply chains and destroying demand—but it reduces inflation risk to a degree that may be no less than, or even not as much as, the reduction in extreme-scenario risk. The energy and commodity prices that rose during the conflict may not fully unwind. And with optimism stemming from the ceasefire—for example, the market rally on Wednesday—financial conditions are easing.

Once the risk of severe demand destruction is ruled out, what remains is an inflation problem that has not been fully eliminated, and recent increases in energy prices could also bring some “echo effect.” Even if the ceasefire holds, the impact will continue—though less than before.

Timiraos cited Marc Sumerlin, managing partner of the economic advisory firm Evenflow Macro, as saying: “As the probability of a recession declines, the probability of inflation rises instead, because price pressure is still there, but demand destruction is not as severe.”

Timiraos noted that, at the same time, the ceasefire also reduced another risk that is less likely but more disruptive—namely, energy prices continuing to skyrocket, forcing the Federal Reserve to consider rate hikes.

Timiraos noted that the Federal Reserve’s March meeting minutes show that officials were weighing two risks posed by the war: on the one hand, it could lead to a sudden deterioration in the labor market, requiring rate cuts; on the other hand, it could cause inflation to stay uncomfortably high for the long term, requiring rate hikes.

In the forecasts released after the meeting, most officials still expected at least one rate cut this year. But the meeting minutes stressed that this expectation depends on whether inflation resumes moving back down toward target. The minutes said two officials had already postponed their judgment about when they would consider rate cuts appropriate, because recent inflation has not shown improvement.

In its statement after the meeting, the Fed still hinted that the next interest-rate action is more likely to be a reduction than an increase. But the minutes show that, compared with the January meeting, the number of officials who believed this “tilt” could be reversed had increased. The minutes pointed out that if the wording of the statement were adjusted, it would mean that if inflation continued to run above target, rate hikes could also be a suitable choice.

Timiraos said the Fed’s current stance reflects an “overlay problem,” and he cited remarks recently made by Federal Reserve Chair Powell:

Last week, Powell said that after the pandemic, the Russia-Ukraine conflict, and last year’s import tariff increases, the Fed is facing its fourth supply shock in recent years.

The Fed’s policy has enough room to stand by and assess the economic impact, but Powell also warned that a string of one-off shocks could weaken the public’s confidence that inflation will return to normal. The Fed is highly focused on this risk because it believes inflation expectations could become “self-fulfilling.”

Timiraos said that even before this week’s ceasefire announcement, current and former Fed officials had already said that even if the conflict is resolved quickly, it does not necessarily mean policy will immediately return to normal. Part of the reason is that the world has already seen how easily the Strait of Hormuz can be blocked; this vulnerability may be factored into energy prices and corporate decision-making for years to come. Some geopolitical analysts have questioned whether the ceasefire can bring energy prices fully back to pre-war levels. Iran has strong incentives to keep oil prices high to secure reconstruction funding and maintain influence over neighboring Gulf states.

Timiraos cited remarks from last week by Musalem, president of the Federal Reserve Bank of St. Louis, as saying that even if the conflict ends within the next few weeks, he would focus on those “ripple effects” that could still push prices higher after supply chains recover. “I’ve been looking for these echoes, because even if the war ends quickly, it still takes time to restore damaged productive capacity.”

Timiraos said the Fed’s cautious stance echoes a framework proposed more than twenty years ago by then Governor Bernanke: central banks should decide how to respond to an oil-price shock based on the inflation level at the time the shock occurs:

If inflation is already relatively low and expectations are stable, policymakers can “ignore” the inflation pressure caused by rising oil prices; but if inflation is already above target, then the risk that a supply shock further disrupts inflation expectations calls for tighter policy, and some officials believe that this is the situation the Fed is currently closest to.