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

Odaily News: "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 Federal Reserve, this may simply be swapping one problem for another: persistent volatility in energy prices is enough to keep inflation at elevated levels, yet not severe enough to significantly disrupt demand, thereby prolonging the situation of keeping interest rates unchanged. The minutes of the Fed's March meeting emphasized that this war is not the main reason for the Fed's reluctance to cut rates, but rather complicates 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 towards 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 potentially dragging down economic growth and leading to a recession was once the last and strongest argument supporting a resumption of rate cuts. Paradoxically, however, the end of the war may, in the short term, make it harder rather than easier for the Fed to implement accommodative policies. This is because the ceasefire agreement eliminates the worst economic scenario, namely severe price increases disrupting supply chains and destroying demand, which arguably is more important than eliminating the risk of new inflationary pressures.