With new Fed Chair Kevin Warsh settling into his office for his first week on the job, Neel Kashkari told Nikkei that the Fed could ultimately embark on a series of rate hikes if inflation pressures tied to the turmoil in the Middle East continue to build.
If the current storyline persists — with oil and gas prices staying elevated, inflation expectations continuing to climb, and the stock market pushing higher — the Fed and Warsh could find themselves in an increasingly difficult position. Higher energy prices risk feeding into broader inflation pressures at a time when financial conditions are not tightening materially if equities continue to rally.
The challenge for policymakers is that no one knows how long the conflict will last. The longer the war drags on, the harder it becomes for the Fed to dismiss the inflation impact as merely “transitory.” Even if the initial shock comes from geopolitical events, sustained increases in energy prices and inflation expectations could force the Fed to respond more aggressively to preserve its inflation-fighting credibility.
