By Michael S. Derby
April 17 (Reuters) – Federal Reserve Governor Christopher Waller said on Friday that while the U.S.-Israeli war with Iran will likely drive up near-term inflation, a fast end to the conflict would keep the door open to cutting interest rates later this year.
If the war is wrapped up soon, “I see a forecast in which underlying inflation would continue to move toward 2%, leaving me cautious about rate cuts now and more inclined toward cuts to support the labor market later this year when the outlook is more steady,” Waller said before a gathering at Auburn University.
If that doesn’t happen, things become more challenging, the official warned.
“The longer energy prices remain elevated and the Strait (of Hormuz) is constrained, the greater the chances that higher inflation gets embedded across a wide variety of goods and services, various supply chain effects start to emerge, and real activity and employment start to slow,” Waller said.
Waller’s remarks are likely to be the last from a Fed policymaker on monetary policy before officials enter their pre-meeting blackout period ahead of an April 28 to 29 gathering where they are widely expected to hold rates steady.
FED’S INFLATION-JOBS DILEMMA
If high inflation and weak hiring came to define the economy, “I’ll have to balance the risks to the two sides of the Fed’s dual mandate to determine the appropriate path of policy, and that may mean maintaining the policy rate at the current target range if the risks to inflation outweigh those to the labor market,” the official said.
Waller flagged considerable uncertainty around what is happening right now and noted that it’s getting harder for the Fed to shrug off what would normally be transient shocks to the economy. “With a sequence of shocks, policymakers need to be more vigilant,” Waller said, adding, “This is because if the shocks hit one after another, they will keep inflation elevated for quite some time.”
In the near term, Waller said he’s looking for the overall personal consumption expenditures price index to hit 3.5% in March, well above the Fed’s 2% target. He also said changes in the job market meant that the level of job creation needed to hold the unemployment rate steady now stands at around zero, which means that job losses in a given month need not necessarily signal a recession.
Waller also said in his appearance that the private credit sector is a relatively small part of the financial market that holds limited systemic risk because money can’t be taken out of these investments rapidly. He added he does not see the sort of risk emerging that echoes what was happening with some types of lending before the onset of the financial crisis nearly 20 years ago.
While Waller supported the Fed’s decision to hold rates steady at the March FOMC gathering, he voted in favor of a rate cut in January and was overruled by his colleagues. Waller has for some time generally supported easing monetary policy. He believes the rise in inflation tied to trade tariffs will be short-lived, while rising job market risks call for the Fed to offer more support to the economy.
Waller spoke as the Lebanese-Israeli ceasefire and Iran’s reopening of the Strait of Hormuz raised hopes for the kind of swift resolution he said could allow the Fed to cut rates. President Donald Trump said the U.S. would maintain its blockade of Iran’s ports. Oil prices dropped and stocks surged while investors moved to increase the odds the Fed will cut its interest rate target by the end of the year.
(Reporting by Michael S. Derby; Editing by Andrea Ricci and Lisa Shumaker)
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