Nick Timiraos, often regarded as the "voice of the Federal Reserve," has written that a ceasefire between the U.S. and Iran offers an opportunity to resolve the latest serious threat to the global economy. However, for the Federal Reserve, this may merely replace one problem with another: an energy shock that lasts just long enough to keep inflation elevated, yet not severe enough to destroy demand, potentially leading to a prolonged period of unchanged interest rates.
The minutes from the Fed's March 17-18 FOMC meeting, released early Thursday Beijing time, indicate that the war was not the primary reason for the Fed's reluctance to cut rates but rather complicated its already cautious stance. Even before the conflict erupted, the path to rate cuts had narrowed. The labor market has stabilized sufficiently to ease recession concerns, while progress toward the Fed's 2% inflation target has stalled.
During that meeting, the Fed held the benchmark interest rate steady in the range of 3.5% to 3.75%, marking the second pause after three consecutive rate cuts in the final months of 2025.
According to the Fed minutes, the "vast majority" of officials believed that progress in reducing inflation might be slower than expected, driven by three overlapping concerns: the impact of tariffs on goods prices may take longer to dissipate; oil prices are filtering into underlying inflation measures; and the risk that years of above-target inflation could make consumers and businesses more tolerant of further price increases.
Timiraos noted that the risk of an expanded conflict dragging down growth and pushing the economy into recession had been the last strong argument in favor of resuming rate cuts. Paradoxically, ending the war in the short term might actually make it harder, not easier, for the Fed to ease policy.
This is because a ceasefire eliminates the worst-case economic scenario—where severe price increases disrupt supply chains and destroy demand—and arguably does more to remove the risk of new inflationary pressures. Energy and commodity prices that rose during the conflict may not fully retreat, while financial conditions, such as Wednesday's market rally, are easing on ceasefire optimism.
With the risk of severe demand destruction removed, what remains is an inflation problem that had not been fully resolved even before the recent energy price increases—if the ceasefire holds, the impact of these increases, though milder than before, could still persist.
Marc Sumerlin, Managing Partner at economic consulting firm Evenflow Macro, stated, "As recession odds decline, inflation odds rise because we face price pressures with less damage to demand."
Simultaneously, a ceasefire also reduces the likelihood of a less probable but more destructive scenario where a prolonged surge in energy prices forces the Fed to consider rate hikes.
The March Fed minutes, released with the customary three-week delay, show officials grappling with the dual risks posed by the war: on one hand, the potential to exacerbate a sudden deterioration in the labor market, which would call for rate cuts; on the other, the risk of entrenching persistently high inflation, which would necessitate rate hikes.
Most officials, in their post-meeting projections, continued to expect at least one rate cut this year. However, the minutes emphasized that these expectations depend on whether inflation resumes its decline toward the target. Given the recent lack of progress on inflation, two officials delayed their assessment of when a rate cut would be justified.
The Fed's official post-meeting statement continued to signal that its next rate move is more likely to be a cut than a hike. But the minutes revealed that, compared to the previous meeting in January, more officials believed it might be appropriate to drop this bias. Amending the statement along these lines would indicate that a rate hike could be warranted if inflation persists well above the Fed's target.
Timiraos wrote that the Fed's stance reflects an increasingly complex problem. Fed Chair Jerome Powell stated last week that, following the COVID-19 pandemic, the outbreak of the Russia-Ukraine conflict, and last year's tariff increases on imported goods, the Fed is facing its fourth supply shock in recent years.
He said the Fed is well-positioned to wait and assess the economic consequences but warned that a series of sporadic shocks could undermine public confidence that inflation will return to normal levels. This is a risk the Fed monitors closely, as it believes such expectations can become self-fulfilling.
Timiraos pointed out that even before the ceasefire was announced, current and former Fed officials had indicated that a swift resolution would not necessarily mean the Fed could immediately return to normal operations. Part of the reason is that the world has now seen how easily the Strait of Hormuz can be closed, and this vulnerability may be factored into energy markets and business planning for years to come.
Some geopolitical analysts are skeptical that a ceasefire will bring energy prices fully back to pre-war levels. Iran has strong incentives to maintain high oil prices to generate revenue for national reconstruction and maintain influence over its Gulf neighbors.
St. Louis Fed President Alberto Musalem said last week that even if the conflict ends in the coming weeks, he would be watching for ripple effects that keep prices high even after supply chains recover. He stated, "I am looking for the aftermath... because even if the war ends quickly, it will take time to restore much of the damaged capacity."
Timiraos noted that the Fed's caution echoes a framework proposed over two decades ago by then-Fed Governor Ben Bernanke. He argued that how a central bank should respond to an oil price shock depends on where inflation stands when the shock occurs. When inflation is already low and expectations are firmly anchored, policymakers can "look through" or ignore the inflationary push from rising energy prices.
But when inflation is already above target, the risk that a supply shock further destabilizes expectations necessitates a tightening of policy—a situation some officials say may be closer to what the Fed faces today.
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