Some US Fed officials considered June rate hike on Iran war fallout

WASHINGTON – Some US Federal Reserve officials saw reasons to hike rates at the central bank’s June policy meeting given elevated inflation on fallout from the Middle East war, minutes of the gathering showed on July 8.

“A few participants commented that, in light of these developments, there was a case for raising the target range for the federal funds rate,” the report said.

Still, Fed officials eventually voted unanimously to keep interest rates unchanged at their June 16-17 meeting.

The minutes come under heightened scrutiny as they shed light on the bank’s first rate decision with new chairman Kevin Warsh at the helm.

Warsh, President Donald Trump’s choice to succeed Jerome Powell and lead the central bank, said officials had a “good family fight” during their last meeting.

Policymakers who mulled rate hikes nonetheless “indicated that they supported maintaining the current target range at this meeting,” the Fed minutes said.

Officials also considered various scenarios involving the world’s biggest economy, and almost all indicated that some “policy firming would likely be warranted” if inflation stayed high and the jobs market was steady.

This could mean higher rates if the labour market remained stable but price increases were high due to factors like AI-related demand, war in the Middle East, or the effects of Trump’s tariffs.

In June, the Federal Open Market Committee held interest rates steady for a fourth straight time, keeping them at a range between 3.5 per cent and 3.75 per cent.

Policymakers also projected a rate hike by year-end to counter inflation, which is at three-year highs.

The Fed, which has a dual mandate of maintaining stable prices and maximum employment, said in a shorter statement than usual that inflation was elevated partially due to supply shocks that raised energy prices, triggered by Trump’s war on Iran.

Warsh has since vowed to fight “too high” costs, reiterating that the central bank plans to deliver price stability in the world’s biggest economy.

Price increases, however, have been far above the bank’s 2 per cent target since the pandemic, peaking around 9 per cent in 2022.

With the Fed’s latest statement being stripped of forward guidance on the direction of interest rates, markets are seeking more details on the bank’s thinking.

Investors are impatient to see “how much will be revealed” and what the future of monetary policy might be, said Sam Stovall of CFRA.

While oil prices cooled recently on the back of a temporary US-Iran deal, they surged again on July 8 as both sides exchanged fire and Trump declared the ceasefire “over.”

That could cause a further uptick in inflation as costs trickle through the economy. AFP