A prolonged Iran war increases inflation risks and economic damage, limiting the Fed’s ability to provide clear rate guidance, Minneapolis Fed President Neel Kashkari said Sunday on CBS’s Face the Nation.
On the broadcast, Kashkari said he could not say that rate cuts were forthcoming and he raised the possibility of moving rates higher, citing uncertainty around all aspects of the war.
“I don’t feel comfortable signaling that a rate cut is in the cards. You know, we might be in worse scenarios, we might have to go the other direction,” he said.
Kashkari said that the uncertainty surrounding the conflict makes it impossible for the central bank to offer clear signals on the direction of interest rates. He said he was focused on the war’s effects on both inflation and economic demand, particularly given the continued closure of the Strait of Hormuz, the waterway through which about a fifth of the world’s oil and gas supplies normally flow.
He said he could not signal that rate cuts were coming, further raising the possibility that the Fed might need to move rates upward.
Shift in Tone
In a television appearance on Saturday, Chicago Fed President Austan Goolsbee called the most recent U.S. inflation data “bad news,” the New York Post reported. Against the Fed’s 2% target, headline inflation as measured by the personal consumption expenditures price index was up by 3.5% year-over-year as of March, the Post said.
Kashkari’s comments reflect a notable shift in tone within the FOMC, according to InvestingLive.
At the most recent meeting in April, Kashkari was part of an unusually large dissenting group. He joined the leaders of the Cleveland and Dallas regional Fed banks in voting against the language used in the committee’s monetary policy statement.
All three regional bank presidents supported holding rates steady while keeping the door open for movement in either direction depending on how the war in Iran develops. Fed Governor Stephen Miran also dissented, but he was in favor of a cut, underscoring the depth of the division within the committee.
Held Steady
Ultimately, the Fed held its benchmark rate target range at 3.5% to 3.75% and retained language that characterized the next likely move as a reduction.
The conflict in Iran started in February when the U.S. and Israel launched airstrikes on Iran, triggering a sharp surge in global energy prices and worsening an already difficult inflation environment in the United States. Historically, the central bank has generally considered energy price shocks as temporary, but several officials said that the current situation is complicated by years of inflation already running above the Fed’s target before the war began.
BlackRock’s Managing Director Jeffrey Rosenberg suggested the Fed is likely to remain in a state of internal division for an extended period, InvestingLive noted, a view that aligns with the unusually fractured vote at the latest FOMC meeting.
All this comes as the central bank is preparing for a change in leadership as Chair Jerome Powell will leave that post on May 15. President Donald Trump’s nominee to replace him, Kevin Warsh, will face a Senate confirmation vote soon.
Powell said he will stay on as a Fed Governor once he leaves the chair position.
