The ongoing conflict between the United States and Iran has caused inflation to increase; energy prices most recently boosted annual inflation to a three-year high of 3.5%. If inflation continues to rise, then the Federal Reserve board expects they will have to hike interest rates as an offset, based on revelations in the latest meeting notes recapping the April Federal Open Market Committee (FOMC), where the committee chose to hold interest rates unchanged.
Minutes of the meeting, released weeks after the FOMC convenes for a two-day discussion and vote, stressed that the Fed agreed that lowering interest rates would be appropriate if economic data finds inflation is trending lower again, but “a majority of participants highlighted…that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.”
“Participants agreed that developments in the Middle East were contributing to a high level of uncertainty about the economic outlook,” the notes also read. On top of concerns about elevated inflation, Fed concerns about GDP growth and employment were found to be “tilted to the downside” (meaning there is concern about these running lower than is preferred).
Three Fed governors previously signalled that they did not believe the central bank should include an “easing bias” in its statement following the latest meeting—language that signals the Fed’s next move is more likely to be a cut than a hike.
The April FOMC was the final one with Jerome Powell as chair of the Federal Reserve, but the former chair has made the tradition-breaking decision to remain on the Fed until his term as a governor ends in 2029.
At the April FOMC press conference, Powell cited “legal attacks” on the Fed by the current administration, likely referring to the Trump administration’s accusing Governor Lisa Cook of mortgage fraud and a now dropped Justice Department probe into Powell himself. Trump has been a vocal critic of Powell, repeatedly disparaging the chair for being too hawkish on cutting interest rates.
Trump’s nominee to replace Powell, financier and former Fed Governor Kevin Warsh, has been confirmed by the U.S. Senate, and barring unforeseen circumstances will serve as chair during the next FOMC scheduled from June 16-17. Warsh’s independence from Trump and his attempts to exert more control over the Fed’s decision-making have come under criticism from Democratic lawmakers, including at his confirmation hearing, though Trump recently said he would “let (Warsh) do what he wants to do.”
Former Cleveland Fed President Loretta Mester told Politico that Warsh is unlikely to convince the FOMC to cut interest rates in the near term even if he wanted to, due to current economic projections such as high inflation. The now released Fed Minutes highlighting the rest of the board’s concerns, and the floated possibility of raising rates if need be, also supports this.
