By Steven K. Beckner
(MaceNews) – Just over a week after the Federal Reserve’s policymaking Federal Open Market Committee left short-term interest rates unchanged, majority thinking on the course of monetary policy is little changed, judging from Fed policymakers’ recent comments.
Fed Vice Chairman Phillip Jefferson and other members of the Fed Board of Governors emphasized the inflationary implications of the war with Iran and the related spike in oil and gas prices Thursday evening. All of the officials echoed the FOMC’s assertion about the increased uncertainty which that war has caused.
A notable exception to the consensus on leaving monetary policy on hold has been Gov. Stephen Miran, who continues to argue for additional rate cuts, though not as aggressively as before.
Jefferson said the war poses both upside risks to inflation and downside risks to employment, but he echoed Fed Chairman Jerome Powell in saying monetary policy is “well positioned” to respond to economic developments.
Earlier Thursday, Governor Lisa Cook said the war has tilted the balance of risks “more to inflation,” although she said a “precarious” risk to employment also bears close watching.
And Gov. Michael Barr said the Fed needs to be “especially vigilant” to prevent oil price pressures from unhinging inflation expectations and said it should “take some time” to assess the economic impact of the war. And he said the current policy stance puts the Fed “in a good place to hold steady” while it does that.
The comments come just over a week after the FOMC voted to leave the short-term interest rates it controls unchanged for the second straight meeting amid heightened uncertainty about how the war against Iran and related oil market disruptions will affect the U.S. economy.
After cutting the federal funds rate by 75 basis points in the final three meetings of 2025 and 175 basis points since September 2024, the FOMC left the funds rate unchanged in a target range of 3.50-3.75% (a median 3.6%) last Wednesday. Miran dissented in favor of an immediate 25 basis point rate cut.
In their revised Summary of Economic Projections, the 19 FOMC participants projected a single 25 basis point rate cut by the end of 2026, taking the funds rate down to a target range of 3.25% to 3.50% (a median 3.4%) — the same as in the Dec. 10 SEP.
The FOMC revised its policy statement, which had previously alluded to “elevated” uncertainty about the economic outlook, to add that “the implications of developments in the Middle East on the economy are uncertain.” T
Powell reinforced that point in his post-FOMC press conference and said “we just don’t know” how Middle East developments will evolve. Therefore, he said, the FOMC’s best course is to “wait and see” whether it should change its “moderately restrictive” policy stance.
A host of Fed officials weighed in on the policy implications of the war Thursday, led by Jefferson, who said he “confront(s) an outlook where there is downside risk to the labor market and upside risk to inflation.”
“While that is a potentially challenging situation, I am confident that our current policy stance is well positioned to respond to a range of outcomes,” he said at a Dallas Federal Reserve Bank event hosted by its President Lorie Logan.
Although the FOMC left the funds rate unchanged last Wednesday with his support, Jefferson said the previous 175 basis points of funds rate reductions had ‘.put the rate broadly in the range of neutral while maintaining a balanced approach to promoting our dual-mandate objectives.”
He said “the current policy stance should continue to support the labor market while allowing inflation to resume its decline toward our 2% target as the effects of tariff pass-through are completed. Looking ahead, I believe that the current policy stance leaves us well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, the evolving outlook, and the balance of risks in a timely manner.”
Jefferson said “uncertainty about the economy is elevated, and the rise in energy prices and the conflict in the Middle East add to that uncertainty,” but he added that he still “sees our current policy stance as appropriately positioned to allow us to assess how the economy evolves.”
Despite the war, Jefferson said he “see(s) the U.S. economy continuing to grow, led by resilient consumers and healthy business investment.” But he said “the ongoing uncertainty over tariff policy and the recent jump in energy prices, however, complicates, at least in the short term, the picture on both sides of our dual mandate of maximum employment and price stability.”
Although he still sees the economy “expanding at a similar or slightly faster rate than last year,” he said “there are also significant headwinds to consider.”
“If elevated energy costs persist, they can weigh on consumer and business spending,” Jefferson said. “The potential for an extended conflict in the Middle East adds considerable uncertainty to the global economic outlook.”
While calling the labor market “roughly in balance” and forecasting the unemployment rate will stay near 4.4%, Jefferson said, “The risks to my labor market forecast, however, are skewed to the downside.”
Meanwhile, he said “progress on disinflation has stalled” above the Fed’s 2% target, and he said the war has added “upside risk” to inflation.
“It has been my expectation that the disinflationary process would resume once higher tariffs are no longer pushing up consumer prices,” Jefferson said. “The ongoing trade policy uncertainty and geopolitical tensions, however, pose upside risk to my inflation forecast. At least in the short term I expect overall inflation to move higher, reflecting a rise in energy prices stemming from the conflict in the Middle East.”
In response to a question, Jefferson said the dollar’s appreciation since the war began “actually helps us on the inflation front.”
Cook left no doubt that she too thinks the FOMC must continue to focus primarily on containing inflation in wake of the war in a speech and discussion at Yale University late Thursday afternoon.
She confined most of her comments to financial stability issues in remarks, but when asked about how she sees the Fed’s “balance of risks,” she replied, “I see the balance of risks as being largely, on net, in balance. But I would argue that the inflation risk is greater right now as a result of the Iran war.”
Cook, whom President Trump has attempted to fire for alleged mortgage fraud, noted that, even before the outbreak of war, “we haven’t seen in five years our inflation target being met.”
“So, if that’s the case, and this (war) could have potentially a substantial effect on inflation, and before we were on this disinflationary trajectory, even with excluding tariffs we were close to the vicinity of the target, but certainly tariffs have taken us away from that and now this (war) is added on,” she continued.
“So we could be at this much longer than we anticipated,” Cook added. “So, I think right now the balance of risks has shifted more to inflation.”
Turning to labor market risks, she said, “I see it as being in balance but precariously so.”
In the current “low fire environment” with immigration curbed, “this is a lower equilibrium than we’ve had before in recent years,” said Cook, adding this is “especially tough on young people looking for their first job.”
Labor market softness is “something that we’re watching really very carefully,” she said, “but I think the Iran war has put the balance of my concerns about risks to the dual mandate more towards inflation.”
Also Thursday evening, Barr took a firm stance against resuming rate reductions for the foreseeable future.
“Given the considerable uncertainty about the potential effects of developments in the Middle East on our economy, as well as the other factors I mentioned, it makes sense to take some time to assess conditions,” he told the Brookings Institution. “Our current policy stance puts us in a good place to hold steady while we evaluate incoming data, the evolving forecast, and the balance of risks.”
Before the war caused oil to jump to nearly $120 per barrel, Barr said the economy had been growing “at a solid pace,” but he said the outlook has now been clouded, and different scenarios have become possible.
“If the conflict were to end soon, it is possible its effects on inflation and economic activity could be limited,” he said. “But if it continues for some time, the spike in energy prices and other commodities could have broader implications for both prices and economic activity.”
“We have had five years now of inflation at elevated levels, and near-term inflation expectations have risen again, so I am particularly concerned that yet another price shock could increase longer-term inflation expectations,” Barr went on, adding, “We need to be especially vigilant. Uncertainty about how these developments will unfold is just one of the reasons why I thought it necessary to hold policy steady at least week’s FOMC meeting.”
Miran devoted his Thursday evening speech to the Economic Club of Miami to one of his favorite themes – reducing the size of the Fed’s balance sheet, saying it could be reduced by $1-$2 trillion if certain regulatory and operational changes were made.
“All else equal, reducing the balance sheet has contractionary effects for the economy,” he said. “Contractionary economic effects of balance sheet reduction can be offset with a lower federal funds rate, so long as we are not at the effective lower bound. It is therefore likely that a resumption of balance sheet reduction warrants additional reductions in the federal funds rate relative to baseline projections.”
Although he didn’t address more near-term monetary policy, Miran had said on Monday that he still thinks the FOMC needs to cut rates.
Also earlier in the week, other Fed officials also indicated an unwillingness to adjust the Fed’s rate settings until war and other uncertainties clear.
San Francisco Fed President Mary Daly identified two possible paths for the economy in a brief special statement issued by her Bank on Monday.
“In one, the conflict in the Middle East resolves quickly, oil and energy prices fall, and the impact on the U.S. economy is short-lived and muted,” she said. “Under those circumstances, it likely would make sense to look through the temporary rise in energy prices, assuming inflation expectations remain well anchored.”
But “if the conflict becomes more protracted …. disruptions in energy supply and associated cost pressures could persist, with increased risks for higher inflation, slower growth, and a weaker labor market,” Daly warned, “This would amplify the current tradeoffs for monetary policy, making it harder to balance the risks to both sides of our dual mandate.”
As for monetary policy outlook, “with all this uncertainty,” she said “there is no single most-likely path. With policy in a good place, we need to remain flexible, able to respond to rapidly evolving risks.”
Daly added that “offering too much forward guidance in an uncertain world risks conveying a false sense of certainty…. So, for now, recognizing the uncertainty, examining potential scenarios, and staying focused on restoring price stability and supporting full employment no matter how the economy evolves is optimal communication and appropriate policy.”
Chicago Fed President Austan Goolsbee, who dissented against the Dec. 10 rate cut, has often said the Fed could get back to cutting rates later this this year, and he reiterated that hope on Monday. But he said that in the present “fraught but intense moment,” war-related price pressures won’t allow it.
“At the moment I think inflation has got to be a little ahead of employment” as a Fed focus, he said on CNBC. “To have already been at an inflation rate that was uncomfortably high .. .and now to add something that might be a lasting gasoline price shock, this is an intense moment and we have to hope that this does not prove to be a lasting impact on the economy.”