Iran War Disrupts Outlook, Fed Faces Dual Pressure, Hawk-Dove Battle Imminent

Odaily News Federal Reserve officials are set to convene this week, with their policy outlook already disrupted against the backdrop of the Iran war, which has stalled one-fifth of the global oil supply. Officials will discuss whether the conflict is more likely to undermine economic growth, trigger more persistent inflation, or create a complex scenario of simultaneous economic slowdown and rising prices.

Given that supply shocks during the pandemic era led the Fed to miss its 2% inflation target for five consecutive years, policymakers are more likely to adopt a cautious stance this week, potentially even signaling a hawkish tilt directly. The current inflation rate remains about 1 percentage point above the target and is expected to rise further, especially if oil prices, which have surged nearly 50% in two weeks, remain elevated. Officials must also weigh whether this emerging economic shock, which is expected not only to drive up prices but also to tighten financial conditions, depress asset prices, and increase uncertainty, could become the trigger that breaks the economy's resilience.

Markets expect the Federal Reserve to keep interest rates unchanged at this week's policy meeting. Data since the last meeting show little change in the fundamental outlook, and the Fed is in a leadership transition phase—Kevin Warsh, nominated by Trump, is expected to ultimately gain Senate confirmation and take over from current Chair Powell after mid-May. Nevertheless, Fed officials will still submit new economic projections, striving to judge whether future developments will necessitate a firm stance against inflation by maintaining tight monetary policy, or require offsetting an economic slowdown through interest rate cuts. (Jin10)