Fed Minutes Show Officials See Dual-Sided Risks From Iran War

Federal Reserve officials wrestled with starkly differing scenarios for the US economy following the outbreak of the Iran war, including one that called for interest-rate cuts and another that would require raising rates.

Minutes of the Federal Open Market Committee’s March 17-18 meeting, released Wednesday in Washington, showed most officials worried the war could hurt the labor market and warrant lower interest rates. At the same time, many policymakers highlighted the risk to inflation that might ultimately warrant rate increases. Bloomberg's Mike Mckee joins to break down the Fed Minutes and what this will mean for future rate cutes. A growing number of 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 March 17-18 meeting, released Wednesday 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 labor market and warrant lower interest rates. At the same time, many policymakers highlighted the risk to inflation that might ultimately warrant rate increases.

The William McChesney Martin Jr. Federal Reserve building in Washington.

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.

“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% goal.

At the meeting, officials held the Fed’s benchmark policy rate in a range of 3.5% to 3.75% 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 signaled a desire to hold rates steady as they gauge the war’s fallout.

This week, 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.

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