FOMC Minutes Signal Fed Rate Cuts Still Possible as Iran War Poses Dual Risks

The latest FOMC minutes show that Fed rate cuts are still on the cards even as Fed officials remain wary of the impact that the Iran war could have on inflation and the labor market. However, the Fed is likely to hold rates steady in the meantime as it continues to monitor the situation on a meeting-to-meeting basis.

FOMC Minutes Show Fed Wary of Inflation and Labor Market Risks

According to the minutes of the March Fed meeting, the vast majority of participants judged that the upside risks to inflation and downside risks to employment were elevated. The majority also noted that the risks had increased with developments in the Middle East.

In particular, most participants raised concerns that a protracted Iran war could lead to further softening in labor market conditions, warranting additional rate cuts. They noted that substantially higher oil prices could reduce households’ purchasing power, tighten financial conditions, and reduce growth abroad.

This is significant, as most of the focus has been on the inflationary pressures from the Iran war, with market participants pricing out Fed rate cuts this year on the expectation that the war will drive inflation higher. The FOMC minutes also showed that many pointed to the risk of inflation remaining elevated for longer than expected amid the persistent increase in oil prices, which could call for rate hikes to help bring inflation down to their 2% target.

The Bitcoin price has dropped following the release of these minutes, dropping from around $71,800. The leading crypto is currently trading at around $71,200, down on the day, according to TradingView data.

Still Early To Determine How Iran War Would Affect The Economy

Most participants reiterated that it was too early to determine how the Iran war would affect the U.S. economy. As such, they judged it prudent to continue monitoring the situation and assessing the implications for the appropriate rate decision.

The FOMC minutes also revealed that some participants noted that it is important for the Committee to maintain its balanced approach in promoting its dual mandate, given that both upside risks to inflation and downside risks to employment remain high. It is worth noting that the Fed is likely to hold rates steady at this month’s FOMC meeting, even as it continues to assess the impact of the Iran war on its dual mandate.

The Committee also plans to take into account the extent of departures from its goals and the potentially different time horizons over which they project that employment and inflation will return to levels they judged consistent with their mandate. The vast majority had determined that their 2% inflation objective could be slower than they previously expected due to the tariff effects, rising oil prices, and the risk that years of above-target inflation could make longer-term expectations more sensitive to energy price increases.