Fed Meeting Begins as Iran War Complicates the Path for Interest Rate Cuts
Federal Reserve policymakers begin their two-day meeting on interest rate policy Tuesday, as the ongoing conflict with Iran has raised fears of a global energy crisis and clouded the path for rate cuts.
Fed Chair Jerome Powell and other members of the Federal Open Market Committee will cast their votes Wednesday, with the majority of the 12 voters expected to support leaving the benchmark rate unchanged at its current range of 3.5% to 3.75%.
At least one dissent is certain, with Fed Gov. Stephen Miran adamantly favoring further cuts; he has dissented against quarter-point cuts in favor of larger rate cuts at each meeting since President Donald Trump appointed him last year.
The latest meeting comes at a moment of geopolitical crisis, with the U.S.-Israel war with Iran sending global oil prices soaring and raising the prospect of a renewed surge in inflation.
All eyes will turn to Powell during his press conference after Wednesday’s vote, where he is expected to field many questions about the war’s potential impact on consumer prices and the labor market in the coming months.
Some Fed policymakers have already warned that the war with Iran complicates the path for future rate cuts, with Cleveland Fed President Beth Hammack warning that the central bank’s next move might actually be a rate hike, if an oil shock ignites rapid inflation.
The Fed uses higher interest rates to fight inflation, and lower rates to stimulate the labor market, in line with the central bank’s dual mandate of price stability and maximum employment.
After making three rate cuts last fall, the Fed paused rates at the January FOMC meeting. Financial and prediction markets assess a 99% probability of no rate change at this week’s meeting, and don’t see a rate cut as likely until September at the soonest.
Realtor.com® senior economist Jake Krimmel says that it is “a certainty” that the Fed will remain on pause at this week’s meeting, after inflation data for February showed prices growing above target.
“While the war has spiked energy prices, which the Fed tends to look past because of their volatile nature, it has also injected economic uncertainty into financial markets and raised the prospect of future supply chain shocks,” says Krimmel. “In plain English, the war has increased the chance of inflation pressure reigniting, which means a sure pause Wednesday and potentially for the next several meetings.”
Krimmel says that Powell’s press conference will be a “must-watch” event for markets, as the Fed chair explains how the war has impacted policymakers’ outlook for the next several months.
Although the Fed doesn’t set mortgage rates directly, those rates do move in response to market expectations about future inflation and Fed policy.
Since the Iran war began on Feb. 28, mortgage rates have jumped higher, rising to 6.11% last week from a three-year low of 5.98% in late February, according to Freddie Mac.
Minneapolis Fed President Neel Kashkari, a voting FOMC member, said this month that the war in Iran may create conditions that justify an extended pause in rate cuts.
“Before Iran, it seemed like things were gently heading in the right direction,” Kashkari told The Wall Street Journal regarding inflation. Now, he says the Iran war could complicate that picture by delivering higher inflation on the one hand and a shock to consumer confidence on the other.
“Not being able to size those two things probably puts more weight on sitting tight for a while,” he said.
Inflation as measured by the consumer price index held steady at 2.4% in February, a relatively modest level although still somewhat above the Fed’s 2% target.
However, the Fed’s preferred inflation measure, the core PCE index, showed 3.1% annual growth last month, up from 3% in January.
That will fuel concerns among “hawks” on the FOMC who are focused on keeping a lid on inflation, even if it requires higher interest rates.
Chief among them is Hammack, the committee’s most outspoken skeptic of further rate cuts, who warns that rate relief could be a long way off.
“We could be on hold for quite some time,” Hammack told The New York Times this month. “We’re in a good spot from a policy perspective.”
Hammack warned that the Fed may need to communicate the possibility of rate hikes if inflation does not make steady downward progress over the summer.
“There are two-sided risk to rates,” said Hammack. “If we see more weakness emerging in the labor market, it could mean that we need to provide more accommodation. If we don’t see inflation moving toward target as I expect, it could mean that we need to put more restriction on the economy.”
Powell’s term as Fed chair expires in May, and there are growing questions about whether Kevin Warsh, Trump’s nominee to replace him, will be able to achieve Senate confirmation in time to take over.
Warsh’s confirmation hinges on the resolution of a Justice Department criminal probe into Powell, which a key Republican senator says must be resolved before he will vote on any Fed appointments.
Powell revealed in January that he is under DOJ investigation for his Senate testimony about renovations to the Fed’s headquarters, slamming the probe as a baseless intimidation tactic in Trump’s pressure campaign for lower interest rates.
Sen. Thom Tillis, a North Carolina Republican on the Senate Banking Committee, has been sharply critical of the investigation, calling it “weak and frivolous” and demanding that it be publicly concluded before he votes to advance any nominee to replace Powell.
The investigation into Powell faced a major setback last week, when U.S. District Judge James Boasberg issued a scathing ruling blocking grand jury subpoenas in the matter, saying that “a mountain of evidence” indicates the probe is a tactic to force Powell to vote for lower rates.
But rather than backing down and winding up the investigation, U.S. Attorney for the District of Columbia Jeanine Pirro slammed the ruling as “outrageous” and vowed to appeal.
However, Tillis remains steadfast in his vow to block any Fed nominee while the criminal case is pending, calling the investigation an attack on Fed independence. Warsh’s nomination cannot proceed to a Senate vote without Democratic support as long as Tillis maintains his blockade.
If Warsh is not confirmed by May 15, Powell would continue to serve as Fed chair indefinitely, with Trump’s pressure campaign actually prolonging Powell’s tenure instead of forcing him out.