The Federal Reserve is signaling a cautious approach to interest rate policy as the U. S. and Israel continue their war with Iran. Federal Reserve Chair Jerome Powell indicated that the central bank is likely to maintain current interest rates in the short term, adopting a "wait-and-see" strategy amid the economic uncertainty spurred by the conflict.
Powell, speaking at Harvard University, suggested that the Fed's monetary policy is currently "in a good place" to observe how the war impacts the central bank's dual mandate of maximum employment and price stability. He acknowledged the potential for both "upside risks" to inflation and "downside risks" to employment stemming from the conflict. The central bank anticipates one rate cut in 2026 and another in 2027.
The war's primary economic impact stems from rising oil prices, driven by disruptions to global supply. With the Strait of Hormuz largely closed, a critical artery for oil transport, prices have surged, nearing and sometimes exceeding $100 per barrel. This has led to increased gasoline prices in the U. S. and concerns about broader inflationary pressures. Some economists warn of potential stagflation, reminiscent of the 1970s, should the conflict persist.
Despite the uncertainty, Powell expressed the Fed's "tendency" to "look through" oil price shocks, recognizing that their effects can be temporary. However, he stressed the importance of monitoring the duration and impact of the energy shock on inflation expectations. While some Republican lawmakers are pushing for rate cuts, others caution against overstimulation of consumer demand during wartime, which could worsen inflation. For now, the Fed appears content to assess the situation before making any significant policy changes.
