Trump just made the Fed's rate deliberations even more complicated

The Federal Reserve was already wrestling with a lot of uncertainty about the future path of monetary policy, and President Trump’s weekend strike on Iran’s nuclear sites will likely make that path even cloudier in the near term.

The uncertainty of the part of central bank policymakers was already evident last week in the Fed’s latest “dot plot” outlining future interest rate moves. While eight officials saw two cuts still happening in 2025, seven officials predicted no cuts at all — up from the four officials who made that call previously.

Trump’s strikes on three Iranian nuclear sites over the weekend inject yet another layer of unknowns into those discussions as central bank officials prepare for their next meeting in July and gauge the impact of the president’s trade, tax and immigration policies on the path of inflation and economic growth.

There are worries from some Fed watchers that a sustained increase in oil prices would add to the inflationary impulse already present in the US from Trump’s tariffs.

Wall Street analysts at JPMorgan Chase (JPM) have warned that a prolonged conflict and the potential closure of the critical Strait of Hormuz could drive oil prices as high as $120 a barrel, pushing US inflation back toward 5%.

That could bolster the argument of some hawks at the Fed that rates need to stay where they are for longer to protect against another inflation surge.

On the other hand, there is also an argument circulating on Wall Street that the conflict could push the Federal Reserve to cut interest rates sooner than expected.

“A sustained rise in oil prices could cause the Fed to strike a more dovish tone,” Oxford Economics chief US economist Ryan Sweet wrote in a recent note to clients before Trump’s attack, arguing that an extended oil shock could dent demand and potentially spill over into an otherwise resilient labor market.

For this view to hold, Fed officials would have to get comfortable with the idea that any sudden spikes in oil prices tend to cause only a temporary rise in inflation that can be overlooked — and that any such shock could pose a bigger threat to growth and jobs than to inflation itself.

Fed Chair Jerome Powell told reporters last Wednesday that while it’s possible there could be higher energy prices, what has tended to happen when with turmoil in the Middle East is a spike in energy prices that tends to come down.

“Those things don’t generally tend to have lasting effects on inflation,” Powell said at a press conference after the Fed held rates steady for the fourth meeting in a row.

“Although of course in the 1970s, they famously did, because you had a series of very, very large shocks. But, we haven’t seen anything like that now. The U.S. economy is far less dependent on foreign oil than it was back in the 1970s.”

Powell will likely be asked for his views of how Trump’s new actions will affect the economy as he appears before House and Senate committees Tuesday and Wednesday, as part of a regular semi-annual appearance before Congress.

The Fed will also get a new look at inflation this Friday with the release of the May Personal Consumption Expenditures (PCE) report.

Economists expect annual “core” PCE — which excludes the volatile categories of food and energy — to have clocked in at 2.6%, up from the 2.5% seen in April. Over the prior month, economists project “core” PCE at 0.1%, unchanged from May.

One influential voice at the Fed did get louder about the case for cuts in the days before Trump’s attack, dismissing concerns that any inflation from the president’s tariffs could be long lasting.

In fact, Fed governor Christopher Waller on Friday told CNBC that rates could be cut at the next meeting on July 29-30.

“We could do this as early as July,” Waller said.

“I think we’ve got room to bring it down, and then we can kind of see what happens with inflation,” he said, adding the central bank could pause if needed due to a shock from developments in the Middle East.

One of his colleagues, San Francisco Fed president Mary Daly, is not on the same timetable.

“For me, I look more to the fall,” Daly said in a separate interview on CNBC. “By then, we’ll have quite a bit more information, and businesses are telling me that’s what they’re going to look to for some resolution.”

Richmond Fed President Tom Barkin additionally told Reuters in an interview published Friday that he was not in any rush to cut due to concerns that tariffs could push inflation up and data showing the labor market remains resilient.

That aligns with statements made by Powell. He noted last week that recent inflation reports have been favorable, but that goods prices have been moving up following the introduction of new tariffs and there could be more of that this summer.

“We’re beginning to see some effects, and we do expect to see more of them over the coming months.”

Thus, the right thing to do for now, he added, is “hold where we are” on rates.

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