Fed officials voice growing concern over fallout from Iran war

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Washington – Three Federal Reserve officials on March 26 expressed growing anxiety over the US economic outlook due to the war in the Middle East, with one policymaker saying the spike in oil prices had shifted the balance of risks for now, leaving inflation as a bigger concern than employment.

“I would argue that the inflation risk is greater right now as a result of the Iran war,” Fed governor Lisa Cook said while answering questions after a speech in New Haven, Connecticut. “With respect to the labour market, I see it as being in balance, but precariously so.”

Ms Cook gave no indication of how she thought policymakers should respond, though two of her colleagues, also speaking on March 26, said they preferred to keep rates on hold as they assessed how the war might affect inflation and growth.

“It makes sense to take some time to assess conditions,” said Fed governor Michael Barr in remarks at an event in Washington. “Our current policy stance puts us in a good place to hold steady while we evaluate incoming data.”

Mr Barr highlighted that even before the war sent energy prices higher, he was concerned the impact of tariffs on inflation might continue beyond 2026.

If the war continues on for some time, “the spike in energy prices and other commodities could have broader implications for both prices and economic activity”, he said. “I am particularly concerned that yet another price shock could increase longer-term inflation expectations.”

Fed vice-chair Philip Jefferson also said the length of the conflict and its impact on energy prices would prove crucial.

“An extended bout of elevated energy prices could put upward price pressure on a variety of other products,” he said. “As a policymaker, I will monitor to see if these higher costs become embedded in prices throughout the economy.”

The US central bank left interest rates unchanged at its March 17-18 policy meeting, and noted elevated uncertainty created by the war. It is trying to balance inflation, which was about a percentage point above its 2 per cent target in January and is set to climb further on the back of a surge in oil prices, against a labour market that has seen very little hiring over the past year.

Ms Cook said tariffs had already moved inflation away from the Fed’s target, and that the Middle East situation could potentially have a substantial effect also.

“We could be at this for much longer than we anticipated,” Ms Cook said. “So I think right now, the balance of risks has shifted more to inflation.”

Fed governor Stephen Miran said at an event in Miami that he still thinks underlying inflation is heading towards 2 per cent over the coming 12 months. 

Mr Miran also said it is possible the Fed could shrink its balance sheet by US$1 trillion (S$1.28 trillion) to US$2 trillion, but cautioned that many accompanying measures would be required and the process could take years. BLOOMBERG