Fed's Waller strikes a cautious tone on rate cuts amid oil shock

Federal Reserve governor Chris Waller said Friday that whether or not the Iran war ends soon, he’s cautious about cutting interest rates right now.

Waller stressed that he’s aware that consumers and businesses are experiencing a jolt from higher energy prices right after tariffs pushed up inflation over the past year. They will be “cautious,” he said, when looking at what he called this sequence of “transitory shocks.”

“While intellectually it makes sense to look through each shock, with a sequence of shocks, policymakers need to be more vigilant,” Waller said in a speech in Alabama.

“If the shocks hit one after another, they will keep inflation elevated for quite some time,” Waller said. “The standard ‘look through’ can become problematic if businesses and households start to believe inflation is persistently high and it affects their price- and wage-setting behavior.”

Waller said that while consumers have mostly shrugged off the effects of tariffs in their spending and may do so with higher energy prices, there is likely a threshold at which consumers start to pull back on spending, which would impact hiring. Waller warned that the longer the conflict continues, the more closely he’ll watch payrolls and the unemployment rate for signs of weakening in the job market.

Read more: March CPI breakdown: Iran war sends gas prices skyrocketing, airfare climbing

Waller noted that if the Strait of Hormuz opens and trade flows return somewhat to normal, then he could look through the effect of recent higher energy prices on inflation and focus more on the job market. But that would leave him cautious about rate cuts now and more inclined toward cuts to support the labor market later this year, if the outlook is steadier.

But Waller said that the longer energy prices remain elevated, the greater the chances that higher inflation becomes embedded across a variety of goods and services. Supply chain effects could emerge, and the economy and employment could start to slow. That would mean the Fed would face higher inflation and a weaker job market. In this situation, Waller said, he’d have to look at both sides, and that may mean holding rates steady if inflation turns out to be a bigger risk than a drop in job growth.

Elsewhere on Friday, San Francisco Fed president Mary Daly said interest rates are in a “very good place” and “slightly restrictive.”

She said the path for rates depends on how long the Middle East conflict lasts. The Fed could leave rates where they are, which would still hold back inflation. But if inflation were to take off, which is not her base case, then the Fed could raise rates. If the conflict ends quickly and oil prices fall, the Fed could return to its previous path for cuts.

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.

Click here for the latest economic news and indicators to help inform your investing decisions

Read the latest financial and business news from Yahoo Finance