Federal Reserve Governor Christopher Waller stated on Friday that although rising oil prices could intensify inflationary pressures, the possibility of an interest rate cut this year remains if the labor market continues to show signs of weakness. In a media interview, Waller indicated that it is currently "necessary to proceed with caution," but this does not imply that policy will remain unchanged for the entire year. He emphasized that the Federal Reserve needs to observe the actual economic impact of the oil price shock. If subsequent developments remain relatively stable and the job market continues to deteriorate, he would again support lowering the policy rate later this year.
This week, the Federal Reserve held interest rates steady for the second consecutive time, while maintaining its expectation for one rate cut within the year. However, it explicitly noted increased uncertainty stemming from the situation in the Middle East. Waller revealed that, were it not for the new risks arising from the Iran conflict, he would have been inclined to dissent once more against the decision to hold rates steady. This indicates that geopolitical factors are beginning to significantly influence policy judgments.
He further pointed out that the pass-through effect of rising oil prices on inflation is distinctly different from a typical tariff shock. As a crucial intermediate input, increases in energy prices ultimately permeate broader goods and services prices, thereby elevating the overall inflation level. As the conflict persists, the risk of oil prices remaining elevated increases, suggesting that inflationary pressures could become more persistent.
Recent economic projections also reflect this trend. Federal Reserve officials raised their 2026 inflation expectation from a previous 2.4% to 2.7%, and similarly increased the core inflation expectation to 2.7%, indicating reduced confidence in the path of inflation's decline.
Simultaneously, uncertainty in the labor market is also rising. The policy statement removed the previous description of the job market as "stabilizing," instead noting that the unemployment rate has "changed little recently." Waller commented that while some research suggests the job market's "break-even point" is near zero growth, this assessment is difficult to fully accept based on practical observations, reflecting the complexity of evaluating the current employment situation.
Divergence remains within the Federal Reserve regarding the future policy path. Vice Chair for Supervision Michelle Bowman, speaking earlier the same day, stated she still anticipates three 25-basis-point rate cuts in 2026, but concurrently acknowledged that the impact of the Iran conflict is challenging to assess.
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