"Federal Reserve Insider": The Resurgence of War in the Middle East Reignites the Nightmare of Inflation, Future Rate Cut Space is Limited

Nick Timiraos, a reporter for The Wall Street Journal known as the "Fed Insider," pointed out that the Federal Reserve has believed for the fifth consecutive year that inflation would finally return to the 2% target, only to be disrupted again by another sudden change. Initially, it was the aftermath of the pandemic; then came the Russia-Ukraine conflict; last year, it was a sweeping tariff plan. The U.S. began attacks on Iran at the end of February, and the situation in the Middle East has disrupted the Strait of Hormuz, causing the fight against inflation to stall, and the days to achieve the inflation target may be further delayed.

The Federal Reserve will hold a meeting this week, and the market expects the federal funds rate target range to remain unchanged. Timiraos stated that the market needs to pay attention to three key points: first, the policy statement; in January, a few officials attempted to remove language suggesting that the next step would be a rate cut, but they were unsuccessful. If an adjustment is made this time, it would be the first official acknowledgment that the easing cycle may have ended; second, the quarterly forecasts, where 19 officials will make judgments about future inflation and interest rate trends; finally, Chairman Powell's press conference, which will either amplify or downplay the policy signals.

Timiraos indicated that in the short term, due to uncertainty being omnipresent, it is almost certain that the Federal Reserve will remain inactive, just as officials were at a loss after announcing the tariff plan last spring. Eric Rosengren, who served as president of the Boston Fed for fourteen years, stated that the inability to clarify the specific impact of each shock on the economy makes it difficult for the Federal Reserve to make decisive decisions.

He concluded that after last year's rate cuts, many officials believe that their current policy may not have much constraint on the economy, and if there is no substantial economic weakness, their room for further rate cuts is minimal. The continuously worsening inflation situation makes them feel even more constrained when using the little remaining space for rate cuts