Trump’s war with Iran is jeopardizing his plan for Fed rate cuts this year
By Bryan Mena, CNN
Washington (CNN) — The US-Israeli war with Iran, now stretching into its third week, is dashing hopes that the Federal Reserve will lower interest rates at all this year.
The war has sparked the biggest disruption to oil supply in history, sending energy prices higher and threatening to jack up the cost of nearly everything Americans buy. At the same, investors and Fed officials are still waiting to see the full effects of President Donald Trump’s tariffs on inflation.
Already, the central bank forecasts only one quarter-point rate cut this year — and new projections are set to be released Wednesday. But as the war drags on, any rate cut is likely delayed further.
“While the Fed typically looks through oil shocks, we’ll be lucky to get even one rate cut this year,” Rick Gardner, chief investment officer at RGA Investments, wrote in a recent analyst note. “And if it does come, it would likely be towards the end of the year when there is a new Fed Chair and when there is more data to assess on the inflation and jobs front.”
In January, Trump nominated Kevin Warsh to lead the central bank after Fed Chair Jerome Powell’s tenure ends in May. If confirmed by the Senate, Warsh is expected to argue for lower borrowing costs. But the war with Iran has likely upended that strategy.
After this week’s meeting, Powell technically has just one more as chair. However, he could remain in that role if Republican lawmakers aren’t able to get Sen. Thom Tillis of North Carolina on board with nomination of the next chair.
Tillis has said he intends to block all Fed nominations unless the Trump administration drops its investigation of Powell’s handling of the Fed’s headquarters renovation.
Muddling the picture
Last April, Trump rolled out a series of punishing tariffs on all of America’s trading partners. Many economists believed the levies would push up costs for American businesses and individuals. While inflation has ticked up for many imported items since the tariffs were implemented, lower energy costs largely balanced out much of that increase.
The war with Iran looks set to erase that buffer.
Even though the Supreme Court in January struck down the bulk of those tariffs, Trump quickly introduced a new, global 15% duty on all imported goods into the United States.
Several Fed officials, including Powell, have said Trump’s tariffs will ultimately result in just a one-time increase in the price level. Now, central bank policymakers must also consider how that increase will intertwine with the economic effects of the conflict in the Middle East.
“We already had these big question marks,” Chicago Fed President Austan Goolsbee told The Wall Street Journal in a March 6 interview, explaining how the oil crisis is now making it difficult to discern tariff inflation.
“It does dovetail energy prices with what’s going to happen with tariffs,” he said.
The war’s economic impact depends largely on the conflict’s breadth and duration. Experts say the disruption to the global energy market has already been greater than anything seen in modern history, including the 1973 Arab-Israeli War, which led to a yearslong oil crisis in the United States. There’s also little sign of the current war ending anytime soon, as Iran intensifies its attacks on energy infrastructure across the Middle East.
“We’ll have to see how persistent this is,” New York Fed President John Williams told reporters at a March 3 event in Washington, DC, referring to the global energy shock. “The important question is quantitatively how big of an effect does that have on the US and how persistent those effects are in terms of price stability.”
The economic crosscurrents are putting Fed officials — once again — in a difficult spot where they have to balance the twin threats to their dual mandate of stable prices and full employment, and determine which risk to address first.
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