A big news is coming out from America amidst Iran Israel War. Due to increase in crude oil prices and increase in inflation due to war, the US Central Bank Federal Reserve may postpone any cut in interest rates. Policy makers and experts believe that the war has created turmoil in the markets and recent economic data has started showing signs of weakness. The Fed begins its two-day meeting on Tuesday, and will announce the benchmark lending rate in the world’s largest economy a day later.
The Central Bank had reduced the rates three times in a row last year, after which it kept them stable in the January meeting. Its objective is twofold: to keep inflation close to the long-term target of two percent and at the same time ensure maximum employment. Global oil prices are rising rapidly due to the war in the Middle East, which could increase overall inflation and hinder growth; In such a situation, analysts say that there is little possibility of policy makers taking any steps now.
possibility of inflation increasing
Gregory Daco, chief economist at EY-Parthenon, told AFP that this is certainly a difficult time for the Fed, because it is very difficult to deal with supply shocks; These increase inflation and reduce production. Affordability is a key political issue for President Donald Trump; He has claimed that prices are coming down, while consumers are complaining about high prices of basic goods.
Trump has repeatedly insulted Fed Chairman Jerome Powell. Additionally, the Justice Department had also threatened to bring criminal charges against Powell as part of an investigation into cost overruns at a Fed renovation project. Although consumer inflation has declined from a high of 9.1 percent during the Covid pandemic, it still remains well above the Fed’s target of two percent.
KPMG chief economist Diane Swonk said that unlike other countries, which have already achieved some degree of price stability, we have not been able to achieve price stability even after five years. He warned that depending on how long the Iran war lasts, inflation could again rise above four percent. Dako said that I think the main thing here is that we are seeing that inflation is moving away from the Fed’s two percent target, and because of this, many of the Fed’s policy makers may take an even more stringent stance.
dual purpose
However, raising rates to cool the economy could put the Fed in conflict with its other objective: controlling unemployment. According to government data, 92,000 jobs were lost in America in February, contrary to expectations, while the unemployment rate increased to 4.4 percent. Experts say that the stability seen in the unemployment rate is actually hiding the turmoil going on beneath the surface.
The demand for labor is decreasing, but unemployment has not suddenly increased, because along with this, the supply of labor has also decreased due to Trump’s strict immigration policies. Dako said labor demand indicators are showing worrying signs, including low hiring rates at “the lowest level in a decade,” slow wage growth and business leaders talking about AI replacing the workforce.
Swonk said the growing uncertainty over the war in Iran and its consequences will further reduce labor demand. He said that uncertainty acts like a kind of tax on the economy, and the first step companies take as a defense is to stop hiring. And the latest data ahead of the Fed meeting is also not encouraging; The US GDP growth forecast in the last months of 2025 has been significantly reduced.
‘Between death and the devil’
However, some Fed policymakers have been cautious when talking about potential inflationary shocks from the war. Fed Governor Christopher Waller expressed sympathy for consumers facing rising gasoline prices on Bloomberg TV last week. He said that but for us, who are thinking about future policies, it is unlikely that this will lead to inflation for a long time.
However, Swonk warned that any economic downturn caused by the war could be difficult to recover from immediately. “I think people are underestimating the risk of long-term effects of the war,” he said, adding that supply disruptions don’t just impact oil prices.
Regarding policymakers trying to balance inflation and unemployment, Swonk said there is no doubt that they are stuck in a ‘well in front, ditch in back’ situation, and now this situation has become even more difficult. However, according to Daco, the uncertainty means the Fed is more likely to keep interest rates steady “for a long time.”
Traders have begun to reduce their expectations of an interest rate cut, and Swonk said that raising interest rates could also be an option. He said that this is not a one-way street. We are standing at a busy intersection, and the traffic light there has broken down.