Fed's Kashkari says the Iran war raises inflation risks and may force rate hikes, adding the Fed cannot signal cuts are coming while the Hormuz strait remains closed.
Summary:
- Minneapolis Fed President Neel Kashkari said Sunday that a prolonged Iran conflict increases inflation risks and economic damage, limiting the Fed's ability to provide clear rate guidance, according to his appearance on CBS's Face the Nation
- Kashkari said he could not signal rate cuts were forthcoming and raised the possibility of moving rates higher, citing uncertainty around all aspects of the war, per CBS Face the Nation
- The Strait of Hormuz, closed since US and Israeli airstrikes on Iran on February 28, handles around 20% of global oil and gas supplies, according to both sources
- Kashkari was among an unusually large group of dissenters at the most recent FOMC meeting, voting against the language in the monetary policy statement, per both reports
- The Fed held its rate target range at 3.5% to 3.75% at the latest meeting, retaining language indicating the next move was expected to be a cut, according to the first source
- Dissenters from the Cleveland, Dallas and Minneapolis regional Fed banks favoured holding rates and leaving the direction open, while Fed Governor Stephen Miran dissented in favour of a cut, per the first source
- BlackRock's Rosenberg flagged that the Fed is likely to remain divided for a prolonged period, according to the second source
Federal Reserve Bank of Minneapolis President Neel Kashkari said on Sunday that the ongoing war between the United States and Iran is raising the risk of sustained inflation and broader economic damage, and that the uncertainty surrounding the conflict makes it impossible for the central bank to offer clear signals on the direction of interest rates.
Speaking on CBS's Face the Nation, Kashkari said he was closely focused on the war's effects on both inflation and economic demand, particularly given the continued closure of the Strait of Hormuz, the chokepoint through which roughly a fifth of the world's oil and gas supplies normally flow. He said he could not signal that rate cuts were coming, and went further, raising the possibility that the Fed might need to move rates in the opposite direction.
The comments reflect a notable shift in tone within the FOMC. At the most recent meeting, Kashkari was part of an unusually large dissenting group, joining the leaders of the Cleveland and Dallas regional Fed banks in voting against the language used in the committee's monetary policy statement. All three regional bank presidents backed holding rates steady while keeping the door open for movement in either direction depending on how the war develops. Fed Governor Stephen Miran also dissented, but in favour of a cut rather than a hold, underscoring the depth of the division within the committee.
The Fed ultimately held its benchmark rate target range at 3.5% to 3.75%, retaining language that characterised the next likely move as a reduction. But with multiple senior officials now publicly questioning that framing, the credibility of that forward guidance is under pressure.
The conflict began on February 28 when the US and Israel launched airstrikes on Iran, triggering a sharp surge in global energy prices and worsening an already difficult inflation environment in the United States. The Fed has historically looked through energy price shocks on the basis that they tend to be temporary, but several officials have noted that the current situation is complicated by years of inflation already running above the central bank's target before the war began.
BlackRock's Rosenberg added to the cautious outlook, suggesting the Fed is likely to remain in a state of internal division for an extended period, a view that aligns with the unusually fractured vote at the latest FOMC meeting. With diplomatic efforts still unresolved and the Hormuz corridor showing no signs of a near-term reopening, the Fed's path forward remains as uncertain as the conflict itself.
