Waller says swift war end could keep rate cut hopes alive

Federal Reserve Governor Christopher Waller indicated on Friday that the ongoing conflict in the Middle East presents a complex challenge for monetary policy, though a rapid conclusion to the hostilities could preserve the possibility of interest rate reductions later this year. Waller noted that the war is likely to exert upward pressure on inflation in the short term, complicating the path for the central bank. In a speech prepared for delivery at Auburn University, Waller emphasized that the duration of the conflict remains a critical factor for the economic outlook. > “The longer energy prices remain elevated and the Strait 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.” The Governor explained that if the economy becomes characterized by persistent inflation and sluggish hiring, the Federal Reserve will face a difficult balancing act regarding its dual mandate. He suggested that the policy rate might remain at its current target range if inflationary risks are deemed to outweigh concerns regarding the labor market. However, a more optimistic scenario remains on the table if the regional situation stabilizes quickly. > “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’s comments come as the United States monitors the escalation involving Israel and Iran. This geopolitical friction has caused volatility for energy benchmarks, including Brent Crude Oil and West Texas Oil, which have seen price spikes followed by recent retreats following reports that the Strait of Hormuz remains open for transit. Regarding specific economic indicators, Waller projected that the overall personal consumption expenditures price index could reach 3.5% in March, a figure notably higher than the Fed's 2% objective. He also pointed to structural shifts in the labor market, suggesting that the level of job creation required to maintain a steady unemployment rate is currently near zero. This implies that modest job losses may not necessarily indicate a recessionary environment. The Federal Open Market Committee is scheduled to meet on April 28-29, where officials are widely anticipated to maintain the current interest rate target range of 3.5% to 3.75%. Waller’s remarks serve as a final communication before the central bank enters its traditional blackout period. Other officials, including New York Fed President John Williams, have also expressed caution, with Williams noting that overall inflation could remain well above 3% for several months. > “With a sequence of shocks, policymakers need to be more vigilant.” Investors have reacted to the shifting diplomatic landscape with cautious optimism. Recent statements from Tehran regarding maritime access, contrasted with continued U.S. pressure, have led to a surge in equity markets as market participants increase the probability of a rate cut by the end of the year.