A top Federal Reserve official has warned that the effects of the Iran War on energy prices could have a ripple effect across multiple sectors of the economy.
Federal Reserve Bank of New York President John Williams made the statement during a Fox Business interviewwarned that the effects of the Iran war on energy prices could spread across multiple sectors of the economy.
“There’s a pass-through of energy prices into a lot of things that we buy, including airfares. … With higher fuel costs, airfares are going to go up,” William said. “It will spread around. It typically takes us into other goods and services. That typically takes months or maybe a year to have that full effect.”
His comments come as oil markets continue to be unsettled amid the conflict in Iran and after the closure of the Strait of Hormuz, an important global oil choke point where about 20% of the world’s oil supply passes through annually.
Williams addressed the gas price spike, saying it puts a strain on household budgets already pressured by inflation. The national average for a regular gallon of gas is over $4, up more than $1 since the war began, according to AAA.
“Higher energy prices affect inflation. It affects also the disposable income that families have, too,” he said. “So, it hits both inflation, but also it hits demand in the economy.”
NY Fed is Well-Positioned
He said the New York Federal Reserve is well-positioned for potential risks.
“I think monetary policy, with the actions we took last year and where we are today, is actually well-positioned to keep those risks in balance, and that’s what we need to do,” he said.
Williams noted that the war on Iran wasn’t a risk the bank could have anticipated and it highlights the limits of monetary policy in responding to sudden geopolitical shocks.
“We can’t control everything in terms of gas prices … changing, but what we can do is try to get monetary policy positioned so that those risks we achieve in our two goals are in balance,” Williams said.
Williams emphasized the importance of an anticipatory approach in monetary policy.
“We have to be forward-looking,” he said. “We have to be looking where the economy is likely to be in the next year or two, because monetary policy actions, they don’t take the full effect on the economy for at least a year.”
Williams joined a chorus of Fed officials commenting on the war and the economy.
Warns Against Impact of Rising Inflation
For instance, St. Louis Federal Reserve President Alberto Musalem said Wednesday that he doesn’t see a near-term need for the Fed to alter its position on interest rates, but warned of rising inflation risks tied to the war with Iran.
“Policy is well positioned to address risks to both dual mandate objectives, and I expect the current setting of the policy rate will remain appropriate for some time,” Musalem said in the text of a speech delivered before a gathering at the American Enterprise Institute in Washington.
Musalem emphasized the uncertainty ahead.
“The economic outlook is highly uncertain,” Musalem said. And while the baseline outlook holds for decent levels of growth, stability in the unemployment rate, and further moderation in inflation, Reuters reported that he added that “uncertainty from the Middle East conflict and unsettled tariff policy could weigh on consumer and business spending in the first half of the year.”
Musalem also said financial conditions are still “broadly accommodative” and stress in private credit markets largely is contained to that sector and is not a sign of broader woes.
Earlier, Chicago Federal Reserve President Austan Goolsbee said in an interview that he’s more worried about inflation now than he is about unemployment.
Current Environment is Difficult
In the CNBC interview, Goolsbee noted that Fed policymaking is difficult in the current environment.
“The most important thing is to figure out the through line of what is happening,” Goolsbee said in a “Squawk Box” interview. “What makes this a fraught but intense moment is nobody can tell us what is going to happen on the ground in the conflict in the Middle East, and how long that lasts.”
Goolsbee dissented on a rate cut in December and said that he agreed with the majority to hold short-term rates steady at the January and March meetings of the Federal Open Market Committee.
He is not an FOMC voter this year but will vote again next year. Last week, FOMC officials last week indicated a majority still expect a cut this year and another the next.
Goolsbee said that his inclination will depend on the progress of inflation, and he cautioned against “a repeat of the team-transitory mistake” where the Fed underestimated the severity of inflation in 2021.
Saying there was still opportunity for interest rate cuts later this year, Federal Reserve Governor Christopher Waller recently expressed caution about current economic conditions.
And, Fed Governor Michelle Bowman said that she believes the Fed can cut three times this year, which would take the benchmark federal funds rate below the neutral level that FOMC officials see as neither supporting nor restricting growth.
A Conservative Approach
Waller, who previously advocated for rate cuts, said that recent developments in the labor market, as well as the uncertainty of the war with Iran, require a more conservative approach.
“It doesn’t mean that I’m going to stay put for the rest of the year,” Waller said on “Squawk Box.” “I just want to wait and see where this goes, and if things go reasonably well and the labor market continues to be weak, I would start advocating again for cutting the policy rate later this year.”
In a Fox interview, Bowman took her position even though she said she expects “strong growth” this year, supported by the supply-side policies that this administration is putting into place.”
Bowman is one of just three Fed officials who see aggressive rate cuts this year, according to a recent update of the Fed’s “dot plot” grid.
