Minutes from the Federal Open Market Committee’s March 17-18 meeting, released Wednesday in Washington, revealed that policymakers grappled with significantly different scenarios for the US economy in the wake of the Iran war, along with the potential policy responses that could arise.
Many officials were apprehensive that a prolonged conflict could negatively impact the labor market, potentially necessitating lower interest rates. Conversely, a significant number of policymakers pointed out the inflation risks that might ultimately justify rate hikes.
Officials advocating for caution appeared increasingly vocal, urging their peers to consider incorporating language in their post-meeting statement that raised the possibility of rate increases under certain circumstances.
“Some participants assessed that there was a strong case for a balanced depiction of the committee’s future interest-rate decisions in the post-meeting statement, indicating that upward adjustments to the target range for the federal funds rate could be warranted if inflation remained above-target,” the minutes indicated.
Reflecting similar concerns, the minutes highlighted that the “vast majority” of officials believed it might take longer to achieve the Fed’s 2% inflation goal.
During the meeting, officials maintained the Fed’s benchmark policy rate within a range of 3.5% to 3.75%.
War Fallout
The meeting took place nearly three weeks after conflict in the Middle East led to rising global energy prices, exerting upward pressure on inflation while also threatening economic growth. Several policymakers have since indicated a preference for keeping rates steady as they assess the war’s consequences.
Overall, policymakers reacted to the conflict by voicing concerns regarding both aspects of their mandate.
“The vast majority of participants viewed the upside risks to inflation and downside risks to employment as elevated, noting that these risks had intensified with developments in the Middle East,” the minutes stated.
In projections released post-meeting, policymakers conveyed an expectation for one interest-rate cut in 2026, consistent with their December forecasts. Investors, however, remain doubtful that the Fed will implement any cuts this year, based on federal funds futures markets.
Most officials anticipated the unemployment rate would remain relatively stable, though the majority conceded that the risks to the labor market leaned toward the downside.
“In particular, many participants warned that, given the current low rates of net job creation, labor market conditions appeared susceptible to adverse disruptions,” the minutes noted.
Additionally, policymakers acknowledged that prolonged conflict in the Middle East would likely lead to more sustained increases in energy prices, which could, in turn, elevate underlying inflation.
Some officials also underscored the possibility that, with inflation exceeding target levels for five consecutive years, “long-term inflation expectations could become increasingly sensitive to fluctuations in energy prices.”
