Federal Reserve policymakers sparred during the central bank’s March meeting over how to respond if the Iran war triggers a prolonged period of high energy prices, according to a summary released on Wednesday.
Minutes of the March 17-18 meeting showed “most” members of the Federal Open Market Committee fretted that a lengthy war could warrant cutting rates to support the jobs market, while “many” suggested it might require raising them to counter higher prices.
The debate among rate setters at the world’s leading central bank underlines the potential for widespread economic fallout if the US and Israel’s war against Iran drags on.
The conflict caused energy prices to spiral in recent weeks as Iran choked off shipments through the Strait of Hormuz, prompting fears of fuel shortages and a sharp rise in inflation.
Brent crude, the international oil marker, surged as high as $120 a barrel in mid-March, up from about $70 when the conflict began. US petrol prices have jumped above $4 a gallon to hit their highest since 2022, while diesel prices have also soared.
A tentative truce reached between the US and Iran on Tuesday has helped to calm markets, with Brent dropping sharply on Wednesday to trade at about $95 per barrel on indications that Iran would reopen the strait. The deal remains fragile, however, as Israeli strikes on Lebanon continue.
The US central bank left interest rates on hold at 3.5 to 3.75 per cent in March for the second meeting in a row as policymakers looked to balance concerns over risks to both sides of its mandate to foster maximum employment and price stability.
“Most participants raised the concern that a protracted conflict in the Middle East could lead to a further softening in labour market conditions, which could warrant additional rate cuts, as substantially higher oil prices could reduce households’ purchasing power, tighten financial conditions, and reduce growth abroad,” according to the minutes.
But the record of the meeting also said: “Many participants pointed to the risk of inflation remaining elevated for longer than expected amid a persistent increase in oil prices, which could call for rate increases to help bring inflation down to the committee’s 2 per cent objective.”
Some committee members even suggested that there was “a strong case” to reflect in the post-meeting statement that there was a “possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation were to remain at above-target levels”.
Still, most of the Fed’s rate-setters deemed it “too early to know” how the war would ultimately affect the US economy and “judged it prudent to continue to monitor the situation and assess the implications for the appropriate stance of monetary policy”.
Fed officials indicated in a set of projections released at the conclusion of the March meeting that they expected the rise in energy costs to push up the central bank’s preferred PCE inflation rate to 2.7 per cent at the end of the year. That was up from the 2.4 per cent they had predicted in December and well above their 2 per cent target.
Policymakers nonetheless signalled in the forecasts that they were still likely to cut rates once more in 2026, though some pushed their expectations of when it would be appropriate further into the future.
