Federal Reserve Minutes: Iran War Poses Dual Risks, Many Officials Concerned Inflation May Require Interest Rate Hikes

An increasing number of Federal Reserve Officials are concerned that the Iran war could further push up U.S. inflation and want to make it clear after the March meeting that the Fed may need to consider raising interest rates. On Wednesday local time, the Federal Reserve released the Minutes of the FOMC meeting held from March 17 to 18, showing that policymakers engaged in heated discussions about the divergent paths of the U.S. economy following the outbreak of the Iran war and potential policy responses. Most officials worry that a prolonged war could impact the labor market, which might then necessitate Interest rate cut. Meanwhile, many policymakers emphasized the upside risks to inflation, which could ultimately make interest rate hikes necessary. This latter group of officials appeared to be taking a firmer stance, pushing colleagues to consider including language in the post-FOMC statement that raises the possibility of interest rate hikes under specific conditions. The Minutes stated that some participants believed the FOMC's post-meeting statement should present the committee's future interest rate decisions in the form of a two-way description to reflect the possibility that raising the target range for the federal funds rate might be appropriate if inflation continues to run above target. Similar views appeared in the Federal Reserve's January Minutes, but the number of supporters increased in March. In what the Federal Reserve calls "counting words," "some" refers to a larger number of officials than the "few" used in January. Echoing these concerns, the Minutes also noted that the vast majority of Federal Reserve Officials believe that the process of inflation returning to the Fed's 2% target may be longer than expected. At this meeting, Federal Reserve Officials kept the benchmark policy interest rate unchanged in the range of 3.5% to 3.75%. Iran War Impact The Fed's March meeting took place about three weeks after the conflict in the Middle East triggered a surge in global energy costs, put pressure on inflation, and threatened economic growth. Since then, several Fed policymakers have signaled a desire to remain on hold and maintain stable interest rates while assessing the war's impact. Overall, the response of Federal Reserve Officials to the Iran war is reflected in dual concerns for both ends of the dual mandate. This week, Trump announced a ceasefire agreement with Iran and planned direct talks in Pakistan this weekend, marking a dramatic shift from his previous threats of massive destruction against Iran. However, sporadic fighting in the region and Iran's claim less than a day later that the agreement had been violated exposed the fragility of the ceasefire reached in the six-week war that triggered a global energy crisis. The Minutes stated that the vast majority of participants judged that both upside risks to inflation and downside risks to employment had increased; most participants noted that developments in the Middle East further exacerbated these risks. Most officials expect the unemployment rate to remain broadly stable, but a majority agreed that the risks to the labor market are tilted to the downside. The Minutes noted that it is particularly noteworthy that many participants warned that, against the current backdrop of sluggish net job creation, the labor market appears vulnerable to adverse shocks. Meanwhile, policymakers pointed out that a prolonged Middle East conflict could lead to more sustained increases in energy prices, which in turn would push up core inflation. Some Federal Reserve Officials also specifically mentioned that with inflation having been above target for five consecutive years, there is a possibility that long-term inflation expectations could become more sensitive to energy price increases. In the economic projections released after the March FOMC meeting, policymakers expected one Interest rate cut in 2026, unchanged from the forecast in December of last year. However, the federal funds futures market shows that investors are generally skeptical about whether the Fed will implement an Interest rate cut this year.