Federal Reserve officials: The shadow of war looms over the economic outlook, the Federal Reserve can hold steady

According to a report by Nick Timiraos, a well-known journalist from The Wall Street Journal, often referred to as the "New Federal Reserve News Agency," Neel Kashkari, president of the Minneapolis Federal Reserve, stated that if inflation cools, it may be appropriate to cut interest rates once or twice later this year, but the war in the Middle East could create a situation that supports a longer pause in actions.

In an interview with The Wall Street Journal on Monday, Kashkari reiterated that he believes the current interest rate range of 3.5% to 3.75% is close to the "neutral level," which neither stimulates nor suppresses the economy. He noted that inflation was gradually declining before the latest round of war broke out, so the economy did not need to maintain a restrictive rate policy. Before the Iran incident, the situation seemed to be gently moving in the right direction. Meanwhile, the labor market has shown a stable but slightly soft performance, not becoming a source of inflationary pressure.

Kashkari pointed out that the war could complicate this situation, but it is still too early to judge the impact. He compared the current situation to the Russia-Ukraine conflict in 2022. That conflict triggered global commodity shocks and indicated that such shocks could be more persistent than expected:

At that time, I was on the side of transitory. It was indeed transitory, just more severe and lasting longer than we expected. Do we really want to go through transitory 2.0 again?

Timiraos noted in the article that after the Federal Reserve cut rates three times last year, it remained steady during the January meeting. The market widely expects the Federal Reserve to maintain this stance at the meeting on March 17-18. The stabilization of the labor market and the hope to see more progress on inflation originally made the possibility of rate cuts before summer unlikely. The Iran war adds another reason to wait.

Kashkari has voting rights on the Federal Open Market Committee (FOMC) this year. He stated that the surge in oil prices could bring conflicting pressures: rising energy costs could exacerbate inflation, thereby supporting tighter policies; but if it impacts confidence and spending, it could support looser policies. In the absence of a clear measure of which of these two effects is more significant, there may be more reason to remain on hold temporarily.

Kashkari also mentioned that in the quarterly economic forecast last December, he had anticipated a rate cut once this year. He believes it is reasonable for the Federal Reserve to maintain a so-called "easing bias," implying in overall communication that the next step is more likely to be a rate cut rather than a hike. "I have no problem with this, but the developments in the Iran situation and their impact on oil prices and other commodities may somewhat overturn this view."