Federal Reserve officials say the conflict in Iran could impact the near-term inflation outlook and add to economic uncertainty. This may push back the timeline for any further interest rate cuts until later this year.
One senior official noted that the war is “something that would obviously affect the nearer-term inflation outlook.” He added, “We’ll have to see how persistent this is, but it would have an effect on overall inflation.” The official also stated that the situation raises significant uncertainty about the economic outlook, acknowledging that nobody can be sure how long it will last or what the broader implications will be for financial conditions and oil prices.
However, he pointed out that the U.S. economy is not as dependent on oil as it was fifty years ago, and past experience suggests that movements in oil prices don’t fundamentally shift the economy’s trajectory. He explained that his focus is on how the conflict affects the underlying strength of the U.S. economy and the inflation rate.
Another official echoed these concerns, stating that the conflict exacerbates what she sees as a considerably uncertain economic outlook. While she acknowledged continued upside risks to inflation, she still expects it to decrease later this year as the effects of other economic factors begin to fade.
A third official, who had previously anticipated one interest rate cut this year, said the attacks on Iran make him less certain about that forecast. He emphasized that the key question for inflation is how persistent the recent spike in energy prices will be. Oil prices recorded their biggest weekly gain in decades as the conflict passed the one-week mark, with a key global shipping route effectively closed off.
In contrast, other officials expressed less concern. One governor suggested that the central bank typically does not respond to such oil price spikes, as they often represent a one-off shock that boosts headline inflation temporarily but doesn’t necessarily affect core inflation, which is a better predictor of medium-term trends. Similarly, another governor said he does not expect the increase in gas prices to lead to a sustained rise in inflation, noting that it would only be a concern if higher energy costs persisted for a very long time, unlike the sustained shocks seen in the 1970s.
Fed officials are widely expected to hold interest rates steady at their upcoming meeting, as investors are pricing in a high probability of no change. For now, policymakers agree that it is simply too soon to know the full imprint of the conflict on the economy and for how long its effects will last.
