With the US-Iran conflict leading to increased oil prices, the risk of inflation in the US has resurfaced, and the possibility of interest rate hikes remains on the table.
In its March FOMC minutes, the Fed indicated that both interest rate cuts and increases were priced in, while San Francisco Fed President Mary Daly made important statements.
Speaking to Reuters, Mary Daly suggested that high inflation could continue, and said that high inflation figures for March would not surprise anyone.
Daly said that the U.S. was actually facing an inflation problem even before the recent oil price shocks.
He said that following the oil shocks, fighting inflation is now more important and will require more time.
At this point, Daly states that the oil shock stemming from the Iran war has prolonged the process of bringing inflation back to the Fed’s 2% target and could leave the Fed in a wait-and-see position regarding interest rates.
However, he added that if the conflict with Iran is resolved quickly and oil prices fall, a rate cut would not be impossible.
Daly, who considers the probability of a Fed interest rate hike to be lower than the probability of a rate cut or keeping rates stable, outlined two scenarios:
“Scenario One: If the war with Iran is resolved quickly, the ceasefire is extended, oil prices fall, and companies and consumers begin to see a decrease in natural gas prices and other energy costs, we would return to our previous trajectory of reduced inflation. This would keep the possibility of interest rate cuts alive.”
Second scenario: If disruptions to oil supplies due to the war continue even after the war ends, it could keep inflation high for longer than the Fed anticipates. If this happens, we will wait until we are sure we are doing things right.”
*This is not investment advice.
