Former US Treasury Secretary and former Fed Chair Janet Yellen said that with the increase in geopolitical risks stemming from Iran, the Fed may adopt an even more cautious stance on interest rate cuts.
Yellen stated that depending on how long the impact of developments in Iran on oil markets lasts, US economic growth could slow and inflationary pressures could increase.
Speaking via video link at a conference in Long Beach, California, Yellen said, “Recent developments regarding Iran are pushing the Fed into an even more wait-and-see position. They will be more reluctant to cut interest rates than before.” Reminding attendees that inflation is currently about one percentage point above the Fed’s 2% target, Yellen stated that approximately half a percentage point of the current 3% inflation is due to tariffs imposed during President Donald Trump’s administration.
According to Yellen, prior to the shock from Iran, the Fed believed it had largely offset the weakness in the labor market and was expecting inflation to move downwards. However, she noted that the sharp rise in oil prices complicated the picture, warning that prices could remain high or rise further, especially if the Strait of Hormuz, through which a significant portion of oil shipments pass, remains closed for more than a few days.
Yellen, noting that the Fed has not yet brought inflation down to its 2 percent target, said that if market participants develop the perception that “Inflation has fallen to 3 percent, but the Fed isn’t serious about 2 percent,” this could lead to permanently higher inflation expectations. She stated that the establishment of such a psychology would mean a more difficult policy balance for the Fed, and therefore, the central bank might pause interest rate cuts for a longer period.
On the other hand, Yellen stated that despite all geopolitical risks, she remains optimistic about the overall outlook for the US economy, saying, “The US economy is currently quite healthy, and I am optimistic about the economic outlook.”
Yellen also criticized some of the Trump administration’s actions against the Fed. Describing President Trump’s attempt to remove Fed Board member Lisa Cook as “almost unthinkable,” Yellen said the matter was open to review by the US Supreme Court and that Trump could lose the case.
Furthermore, Yellen argued that the Trump administration’s use of the Justice Department as a “weapon” against Federal Reserve Chairman Jerome Powell was unprecedented, stating that the threat of investigation against Powell for his comments on the cost of renovations to central bank buildings posed a serious risk to the Fed’s independence. Yellen added that potential criminal charges would be a “very serious blow” to economic policy and could increase the risk of high inflation.
The former Treasury Secretary also said that the Trump administration’s policies, which have shaken the global economy, have led investors to demand a higher risk premium on US Treasury bonds. He added that increased policy uncertainty has put downward pressure on the dollar, and investors are demanding higher yields in exchange for rising risks.
*This is not investment advice.