On Wednesday, prominent financial journalist Nick Timiraos reported that a ceasefire between the U.S. and Iran offers a chance to ease the latest serious threat to the global economy. For the Federal Reserve, however, this may simply replace one problem with another: an energy shock that lasts just long enough to push inflation higher without severely damaging demand, resulting in interest rates remaining elevated for an extended period.
Timiraos cited the minutes from the Fed's March 17-18 meeting, released Wednesday. The minutes emphasized that the Iran conflict did not make the Fed reluctant to cut rates initially, but rather complicated an already cautious stance. Even before the conflict erupted, the path to rate cuts had narrowed. The U.S. labor market had stabilized sufficiently to ease recession fears, while progress on inflation returning to the Fed's 2% target had stalled.
According to the March meeting minutes, partly due to the risk of a prolonged war, a vast majority of participants noted that progress on inflation returning to the target was likely slower than previously anticipated. They also believed the risks of inflation persisting above the Committee's goal had increased.
At the March FOMC meeting, the Fed held the benchmark interest rate steady in the range of 3.5% to 3.75%. This was the second pause following three consecutive rate cuts in the final months of 2025.
Timiraos suggested that if the risk of the Iran conflict expanding and dragging down growth—potentially pushing the economy into recession—was the last and strongest argument for resuming rate cuts, then paradoxically, an end to the war might make it harder for the Fed to ease policy in the short term. This is because a ceasefire removes the worst-case scenario of severe price spikes disrupting supply chains and destroying demand. However, it may reduce extreme risks more than it reduces inflation risks. Energy and commodity prices that rose during the conflict may not fully retreat. Furthermore, financial conditions are easing with ceasefire optimism, as seen in Wednesday's market rally.
Once the risk of severe demand destruction is eliminated, what remains is an inflation problem that has not been fully resolved. Recent energy price increases could also produce a lingering "echo effect," persisting even if the ceasefire holds, though the impact would be milder than before.
Timiraos quoted Marc Sumerlin, Managing Partner at economic consultancy Evenflow Macro, who said, "As recession probabilities decline, inflation probabilities rise because price pressures remain, but demand destruction is less severe."
Timiraos also noted that a ceasefire reduces another, less probable but more damaging risk: a sustained surge in energy prices that could force the Fed to consider raising interest rates.
The March Fed meeting minutes showed officials were weighing the dual risks from the war: it could lead to a sudden deterioration in the labor market, necessitating rate cuts, or it could cause persistently high inflation, requiring rate hikes. In post-meeting projections, most officials still anticipated at least one rate cut this year, but the minutes stressed this expectation depended on inflation resuming its decline towards the target. Two officials had already delayed their projected timing for appropriate rate cuts due to a lack of recent improvement in inflation.
The Fed's post-meeting statement still implied that the next policy move was more likely to be a cut than a hike. However, the minutes revealed that compared to the January meeting, more officials believed this "bias" could be removed. Adjusting the statement's wording would signal that a rate hike could also be appropriate if inflation persists above target.
Timiraos stated the Fed's current stance reflects a "stacked problem," referencing recent comments by Fed Chair Powell. Powell said last week that following the pandemic, the Russia-Ukraine conflict, and last year's import tariff hikes, the Fed is facing its fourth supply shock in recent years. While Fed policy has room to wait and assess the economic impact, Powell warned that a series of one-off shocks could undermine public confidence that inflation will return to normal. The Fed is highly focused on this risk, as it believes inflation expectations can become "self-fulfilling."
Timiraos pointed out that even before this week's ceasefire announcement, current and former Fed officials had indicated that a swift resolution to the conflict would not mean an immediate return to normal policy. Partly, this is because the world has seen how easily the Strait of Hormuz can be blocked. This vulnerability may be factored into energy prices and corporate decisions for years to come. Some geopolitical analysts doubt a ceasefire will return energy prices fully to pre-war levels. Iran has strong incentives to maintain higher oil prices to fund reconstruction and maintain influence over Gulf neighbors.
Timiraos cited comments from St. Louis Fed President Musalem last week, who said even if the conflict ends in the coming weeks, he would watch for "ripple effects" that could keep prices elevated even after supply chains recover. "I'm always looking for these echoes because even if the war ends quickly, it takes time to restore damaged capacity," Musalem said.
Timiraos concluded that the Fed's caution echoes a framework proposed over two decades ago by then-Governor Ben Bernanke: central banks should respond to oil price shocks based on the prevailing inflation level when the shock occurs. If inflation is already low and expectations are anchored, policymakers can "look through" the inflationary pressure from energy price hikes. But if inflation is already above target, the risk of a supply shock further destabilizing inflation expectations calls for tighter policy—a scenario some officials believe the Fed is closer to today.
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