"Fed Whisperer": Ceasefire Agreement Makes Fed's Decision More Difficult

Odaily reported that "Fed Whisperer" Nick Timiraos wrote that the ceasefire between the US and Iran provides an opportunity to resolve the serious threat currently posed to the global economy. However, for the Fed, this may simply be replacing one problem with another: fluctuations in energy prices persist, enough to keep inflation at elevated levels, yet not severe enough to significantly disrupt demand, thereby prolonging the situation of unchanged interest rates. The minutes from the Fed's March meeting emphasized that this war was not the main reason for the Fed's reluctance to cut rates, but rather complicated the Fed's already quite cautious stance. Even before the conflict occurred, the path to rate cuts had already narrowed. The labor market has stabilized, alleviating concerns about a recession, while progress toward the Fed's 2% inflation target has stalled. The Fed did not adjust interest rates at its March meeting, partly due to concerns about the risks of a prolonged war. The risk of escalating conflict dragging down economic growth and leading to a recession was once the last and strongest argument in favor of restarting rate cuts. Ironically, however, the end of the war in the short term might actually make it harder, not easier, for the Fed to implement accommodative policies. This is because the ceasefire eliminates the worst economic scenario, where severe price increases disrupt supply chains and destroy demand, which arguably is more important than eliminating the risk of new inflationary pressures.