US Fed minutes show officials saw two-sided risks from Iran war
Several policymakers have since signalled a desire to hold rates steady as they gauge the war’s fallout
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[NEW YORK] A growing number of US Federal Reserve officials worried the Iran war could further stoke inflation and wanted to make clear following their March meeting that the central bank may have to consider raising interest rates.
Minutes of the Federal Open Market Committee’s (FOMC) Mar 17 to 18 meeting, released on Wednesday (Apr 8) in Washington, showed policymakers wrestled with starkly differing scenarios for the US economy following the outbreak of the Iran war, and the policy reactions that might follow.
Most officials worried a protracted war could hurt the labour market and warrant lower interest rates. At the same time, many policymakers highlighted the risk to inflation that might ultimately warrant rate increases.
Stephen Stanley, chief US economist at Santander Capital Markets, said the minutes showed the committee saw risks rising for both inflation and employment, and wary of what a longer war may mean.
“A protracted conflict, not the baseline, could further exacerbate both of these risks,” Stanley said in a note to clients. “This left the FOMC firmly on the sidelines.”
Officials who expressed more worry about inflation urged their colleagues to consider adding language to their post-meeting statement that raised the scenario of hiking rates under certain conditions.
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“Some participants judged that there was a strong case for a two-sided description of the committee’s future interest-rate decisions in the post-meeting statement, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation were to remain at above-target levels,” the minutes said.
A similar sentiment appeared in minutes to the Fed’s January meeting, but the size of the group supporting it increased. In the Fed’s lexicon of so-called counting words, “some” refers to a larger number of officials than “several”, the word used in January.
Echoing those concerns, the minutes noted the “vast majority” of officials thought it may take longer to return inflation to the Fed’s 2 per cent goal.
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At the meeting, officials held the Fed’s benchmark policy rate in a range of 3.5 to 3.75 per cent at that gathering.
War fallout
The gathering occurred almost three weeks after war in the Middle East caused global energy costs to begin surging, putting upward pressure on inflation but also threatening to dampen economic growth. Several policymakers have since signalled a desire to hold rates steady as they gauge the war’s fallout.
This week, US President Donald Trump’s announcement of a ceasefire pact with Iran and direct talks this weekend in Pakistan represented a dramatic climbdown from earlier threats to unleash massive devastation on the country.
Yet sporadic fighting across the region, in addition to Iranian claims that there were already violations of that agreement less than a day later, exposed the fragility of the truce for the six-week war that’s triggered a global energy crisis.
There were also lingering questions around whether and how the vital Strait of Hormuz would be opened for safe passage, while hundreds of freighters remained stranded inside the Gulf.
In projections released after the meeting, policymakers signalled an expectation for one interest-rate cut in 2026, unchanged from their December forecasts. Investors are sceptical the Fed will cut at all this year, according to federal funds futures markets.
Most officials at the March meeting said that they expected the unemployment rate to remain little changed, though the majority agreed that risks to the labour market were skewed to the downside.
“In particular, many participants cautioned that, in the current situation of low rates of net job creation, labour market conditions appeared vulnerable to adverse shocks,” the minutes said.
At the same time, policymakers noted that prolonged conflict in the Middle East would likely lead to more persistent increases in energy prices, which could, in turn, push up underlying inflation.
Some officials also highlighted the possibility that, with inflation already running above target for five years, “longer-term inflation expectations could become more sensitive to energy price increases”. BLOOMBERG
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