Federal Reserve Vice Chair Philip Jefferson stated that the conflict in the Middle East will increase uncertainty and push U.S. inflation higher in the near term, but the Fed's current policy stance remains appropriate. Jefferson described current interest rates as broadly positioned in a range that neither stimulates nor restrains the economy, adding that the current policy stance will support employment while inflation retreats to the 2% target as tariff effects diminish.
In prepared remarks for a speech at the University of Detroit on Tuesday, Jefferson said, "I remain cautious about the outlook. Economic uncertainty remains elevated, and rising energy prices along with the Middle East conflict have further heightened this uncertainty. However, I still believe the current policy stance is well-positioned, allowing us to assess how the economy evolves."
While Jefferson indicated he expects the overall disinflation trend to continue, he expressed caution regarding how the Middle East war might affect inflation and consumer demand, noting that the conflict complicates his assessment of price movements. He stated, "Recent increases in energy prices will exert some upward pressure on overall inflation in the near term. Persistent trade policy uncertainty and geopolitical tensions pose upside risks to my inflation forecast."
As the Middle East conflict drives up energy costs and threatens supplies of other key commodities, Fed officials have voiced growing concerns about the U.S. economic outlook. At the March policy meeting, the Fed held interest rates steady and warned that uncertainty stemming from the war remains high.
The Fed is currently attempting to balance inflation—which in January was about one percentage point above its 2% target and is expected to rise further due to higher oil prices—against labor market conditions. While the job market shows signs of stabilizing, job growth over the past year has been limited. Businesses have also begun warning about the impact of the war. The U.S. services sector expanded at a slower pace in March, with employment falling by the largest margin since 2023. Input cost inflation accelerated noticeably, with several executives citing the war as a new source of uncertainty.
Jefferson also signaled caution regarding the labor market. He noted that the job market is broadly in balance but remains vulnerable to the latest round of uncertainty. He said, "If the current high level of uncertainty persists, businesses' reluctance to hire may also continue, restraining job growth for a longer period. I will continue to monitor the pace of job growth to assess potential vulnerabilities in the labor market."
During a Q&A session following his speech, Jefferson acknowledged potential risks in the non-bank lending sector, specifically private credit, which has grown rapidly in recent years. However, a series of high-profile defaults have recently triggered increased investor redemptions. He stated that private credit "has not yet experienced what we would call a full credit cycle, meaning some arrangements in this part of our financial system have not been tested in a downturn." He added, "We will continue to monitor this area very closely to ensure it does not pose broader threats to financial stability."
Jefferson's views align with those of New York Fed President John Williams, who stated that while he expects energy cost increases from the Middle East conflict to push up overall inflation, the "underlying fundamentals for core inflation have not changed significantly." Williams added that he expects core inflation, which excludes food and energy, to rise by only 0.1 to 0.2 percentage points. He emphasized that there is no current need to consider adjusting the benchmark interest rate, describing the present monetary policy stance as "very well positioned" to observe the economic consequences of the Middle East conflict. He noted, "Monetary policy is in the right place, and we can respond as needed if the situation evolves."
Earlier this month, St. Louis Fed President Alberto Musalem also indicated that current interest rate levels remain suitable for addressing economic risks and that no near-term policy adjustments are necessary. In a speech in Washington, Musalem described Fed policy as "in a good place" to address both employment and inflation goals. He expects the current interest rate range to remain unchanged for some time. However, he stressed that the economic outlook remains highly uncertain. While the baseline scenario still involves moderate growth, stable unemployment, and a gradual decline in inflation, the Middle East conflict and trade policy uncertainty could weigh on consumer and business spending in the first half of the year.
On inflation, Musalem warned that rising prices for energy, aluminum, and fertilizers are creating new pressures. In this environment, risks to both employment and inflation are tilted to the downside—the labor market could weaken, while inflation may persist above target for longer.
Fed Governor Michael Barr also supports holding rates steady in the near term. In late March, he stated that policymakers are fully capable of maintaining the current rate level, even as factors like the Middle East conflict complicate the Fed's ability to return inflation to the 2% target. He emphasized that the effects of tariffs on inflation could extend beyond this year, while noting that both non-housing services inflation and core inflation—excluding volatile food and energy categories—remain elevated. Barr said, "Given the considerable uncertainty about the potential impact of Middle East developments on the U.S. economy, along with the other factors I mentioned, it is reasonable to take some time to assess the situation. Our current policy stance puts us in a good position to maintain stability while evaluating data, evolving forecasts, and the balance of risks."
However, some Fed officials have adopted a more hawkish tone. Cleveland Fed President Loretta Mester and Chicago Fed President Austan Goolsbee both view inflation as a more significant problem than employment. This suggests that, with the Middle East war driving up energy prices and the job market operating at a slower pace, they lean toward supporting tighter rather than easier monetary policy.
Fed Governor Lisa Cook stated that the current Middle East conflict has shifted the balance of risks, making inflation a greater concern for policymakers than employment. Cook said, "I believe that, due to the war, inflation risks are higher now. As for the labor market, I see it as balanced, but that balance is fragile. We may remain in the current situation for much longer than expected. Therefore, I believe the balance of risks has shifted more toward inflation."
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