"Fed Whisperer": Fed Rate Cut Prospects Dim Regardless of Ceasefire Deal

On Wednesday, renowned financial journalist Nick Timiraos, known as the "Fed Whisperer," wrote that a ceasefire between the United States and Iran provides an opportunity to alleviate the latest serious threat facing the global economy. However, for the Federal Reserve, this may simply swap one problem for another: an energy shock lasting just long enough to push up inflation without severely damaging demand, thereby leading to interest rates remaining unchanged for an extended period. Timiraos cited the minutes from the Fed's March 17-18 meeting released on Wednesday: The minutes emphasized that the war in Iran did not make the Federal Reserve reluctant to cut interest rates, but rather complicated an already cautious stance. The path for interest rate cuts had already narrowed before the Iranian conflict broke out. The U.S. labor market has stabilized enough to ease recession fears, while progress toward inflation returning to the Fed's 2% target has stalled. The March minutes stated that, partly due to the risk of a prolonged war, a vast majority of participants noted that progress in bringing inflation back to target might be slower than previously expected and believed that the risk of inflation remaining persistently above the committee's target had increased. At the March FOMC meeting, the Federal Reserve kept the benchmark interest rate unchanged in a range of 3.5% to 3.75%, marking the second pause following three consecutive interest rate cuts in the final months of 2025. Timiraos stated that if the risk of the Iranian conflict expanding and dragging down economic growth—plunging the economy into recession—is the last and most powerful argument for resuming interest rate cuts, then paradoxically, the end of the war might make it harder for the Fed to ease policy in the short term: This is because a ceasefire eliminates the worst-case scenario—namely, a severe price surge disrupting supply chains and destroying demand—but it may reduce inflation risks less than it reduces extreme scenarios. Energy and commodity prices that rose during the conflict may not fully retreat, and financial conditions are easing with the optimism brought by the ceasefire, such as Wednesday's market rally. Once the risk of severe demand destruction is removed, what remains is an inflation problem that has not been completely resolved, and the recent rise in energy prices may also bring a certain "echo effect" that persists even if the ceasefire holds, though more mildly than before. Timiraos cited Marc Sumerlin, managing partner of economic consulting firm Evenflow Macro: "As the probability of recession declines, the probability of inflation actually rises because price pressures remain, but demand destruction is less severe." Timiraos pointed out that, meanwhile, the ceasefire also reduces another less likely but more destructive risk—the possibility of a sustained surge in energy prices forcing the Federal Reserve to consider an interest rate hike. Timiraos noted that the Fed's March meeting minutes showed that officials were then weighing the dual risks brought by the war: on one hand, it could lead to a sudden deterioration in the labor market, necessitating an interest rate cut; on the other hand, it could lead to persistently high inflation, requiring an interest rate hike. In post-meeting forecasts, most officials still expected at least one interest rate cut this year. However, the minutes emphasized that this expectation depends on whether inflation resumes its move back toward the target. The minutes stated that two officials had already pushed back their timing for when they believe an interest rate cut would be appropriate due to the lack of recent improvement in inflation. The Fed's post-meeting statement still hinted that the next move for interest rates is more likely to be a cut than a hike. However, the minutes showed that the number of officials who believed this "bias" could be removed had increased compared to the January meeting. The minutes noted that adjusting the statement's wording would mean that if inflation remains persistently above the target, an interest rate hike could also be an appropriate option. Timiraos stated that the Fed's current stance reflects a "compounded problem," citing recent remarks by Fed Chair Jerome Powell: Powell stated last week that following the pandemic, the Russia-Ukraine conflict, and last year's increase in import tariffs, the Fed is facing the fourth supply shock in recent years. The Fed's policy has enough space to wait and assess the economic impact, but Powell also warned that a series of one-off shocks could undermine public confidence in inflation returning to normal. The Fed is highly focused on this risk because it believes inflation expectations can be "self-fulfilling." Timiraos pointed out that even before this week's ceasefire announcement, current and former Fed officials had stated that even a swift resolution to the conflict would not mean an immediate return to normal policy. Partly because the world has already seen how easily the Strait of Hormuz can be blocked, a vulnerability that may be factored into energy prices and business decisions for years to come. Some geopolitical analysts doubt that a ceasefire will allow energy prices to return fully to pre-war levels. Iran has a strong incentive to maintain high oil prices to obtain reconstruction funds and maintain influence over its Gulf neighbors. Timiraos cited remarks made last week by St. Louis Fed President Musalem, who stated that even if the conflict ends in the coming weeks, he will be watching for "ripple effects" that could still push up prices after supply chains are restored. "I've been looking for those echoes because even if the war ends quickly, restoring damaged capacity takes time." Timiraos indicated that the Fed's cautious attitude echoes a framework proposed more than two decades ago by then-Governor Ben Bernanke: central banks should decide how to respond to oil price shocks based on the inflation level at the time the shock occurs: If inflation was already low and expectations were stable, policymakers could "look through" the inflationary pressure from rising energy prices; but if inflation was already above target, the risk of a supply shock further disrupting inflation expectations would call for tighter policy, and some officials believe this is closer to the Fed's current situation.