Fed Officials Remain Uncertain, Hesitant as Middle East Tensions Continue

– Waller Forecasts Possible Rate Cuts but Not until ‘Later This Year’

– Daly ‘Wouldn’t Be Surprised’ If Funds Rate Left Unchanged Through 2026

By Steven K. Beckner

(MaceNews) – Monetary policy remained firmly on hold in the minds of Federal Reserve officials toward the end of the week, amid a rapidly changing situation in the Middle East.

Generally speaking, the Fed remains decidedly on inflation watch.

Although they sometimes cite “downside risks” to the employment side of their dual mandate, Fed officials are mostly confident about the outlook for economic growth and jobs, particularly now that the pall of war with Iran appears to be lifting. They are more cautious about upside risks to inflation as they wait to see if the spike in energy costs and their knock/on effects subside and if, as expected, the impact of tariffs will fade.

Being highly uncertain about the outlook for both growth and inflation, policymakers have indicated they are content to leave their rate settings unchanged until later in the year.

Fed Governor Christopher Waller said Friday he would be inclined to “look through” the recent oil spike toward lower inflation if oil trade normalizes but said he would still be “cautious about rate cuts now and more inclined toward cuts to support the labor market later this year when the outlook is more steady.”

He warned that a combination of higher inflation and a weaker labor market “may mean maintaining the policy rate at the current target range” indefinitely.

San Francisco Federal Reserve Bank President Mary Daly, who was leaning toward at least one 25 basis point rate cut before the Iran conflict erupted, said Friday she now “wouldn’t be surprised” if rates stay the same throughout 2026. But she envisioned scenarios where the Fed might have to either lower or raise rates.

New York Federal Reserve Bank President John Williams, on Thursday, echoed what Fed Chair Jerome Powell has previously said, that “the current stance of monetary policy is well positioned to balance the risks to our maximum employment and price stability goals.”

Similar comments came from various Fed officials earlier in the week.

The comments came against a backdrop of ongoing but easing tensions in the Middle East. While the conflict with Iran has greatly elevated economic and financial uncertainties, a ceasefire and the apparent success of the U.S. Navy’s blockade of Iranian ports have raised hopes in global markets that the worst is over and that a return to relative normalcy in maritime trade may be near.

On Friday morning, Iran’s foreign minister’s announcement of a total reopening of the Strait of Hormuz prompted a plunge in oil prices to near $80 per barrel, compared to a recent high near $120.

What remains a concern is the lingering impact and secondary effects of high energy costs on both inflation and employment. But the perception is growing that worst fears won’t be realized. For now, Fed officials remain “at sea” about appropriate monetary policy as an April 28-29 meeting of the Fed’s policymaking Federal Open Market Committee rapidly approaches.

At its March 17-18 meeting, the FOMC left the federal funds rate unchanged for a second straight meeting in a target range of 3.50-3.75%, after cutting that key money market rate by 75 basis points in the final three meetings of 2025 and 175 basis points since September 2024.

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%).

In a revised policy statement on March 18, the FOMC declared that “the implications of developments in the Middle East on the economy are uncertain.” In his post-FOMC press conference that day, Powell 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.

With the next FOMC meeting less than two weeks off, officials sound more upbeat, but still uncertain and therefore hesitant about making policy changes.

Waller said Friday that “the implications of recent events for monetary policy” depend on “how the conflict evolves and its effect on the economy, both highly uncertain.”

“If the Strait of Hormuz opens and trade flows return somewhat to normal, then I can look through the effect of recent higher energy prices on inflation because I know it will unwind, and my focus will be on how the labor market evolves in the current no-hire, no-fire environment,” he said in a speech at Auburn University.

“Here, abstracting from the effects of tariffs and energy, I see a forecast in which underlying inflation would continue to move toward 2%, leaving me cautious about rate cuts now and more inclined toward cuts to support the labor market later this year when the outlook is more steady.”

But Waller warned that “the longer energy prices remain elevated and the Strait is constrained, the greater the chances that higher inflation gets embedded across a wide variety of goods and services, various supply chain effects start to emerge, and real activity and employment start to slow.”

He said he “will be particularly attentive to indications that this latest price shock, on top of the effects from tariffs, has moved up inflation expectations.”

Waller said, “a slower economy would restrain demand for goods and services, and perhaps soften the increase in prices, but I expect higher inflation than in the first scenario and that it would be elevated for some time.”

“In this case, I also believe we would have a weaker labor market,” he went on. “High inflation and a weak labor market would be very complicated for a policymaker. If I face this situation, I’ll have to balance the risks to the two sides of the Fed’s dual mandate to determine the appropriate path of policy.”

Waller warned that such a balancing act “may mean maintaining the policy rate at the current target range if the risks to inflation outweigh those to the labor market.”

Daly, who will return to the FOMC voting ranks next year, also said monetary policy is currently “in a good place” with the funds rate “on the cusp” of neutral. She said the FOMC might leave the funds rate unchanged throughout the year, but she gave scenarios in which it might resume cutting rates or, if inflation persists, raise rates.

In a question-and-answer session with the Real Estate & Urban Economics’ Spring 2026 Policy Advisory Board meeting, she explained how her thinking on monetary policy has evolved this year.

“Before the oil price shock I thought, well okay, we can continue to adjust the rate down to neutral, so that would be one or two cuts as the economy’s fundamentals continue and inflation continues to come down,” she said.

But she said, “at this point, you know, we’ve got oil prices up and inflation is printing higher, and what I’m looking for is does that spill into other goods and services?”

‘It hasn’t yet,” Daly continued. ‘But I think right now I think policy is in a very good place – slightly restrictive but not constraining the economy so much that the labor market is faltering, not letting go of the reins completely so that inflation is unbridled.”

“And that’s a good place to be,” she went on. “So, we’re in a wait-to-see the data mode and wait to see how the conflict resolves,”

As the data come in and the Middle East situation clarifies, Daly said the question for the FOMC will be: “Is it really a nice place to be?”

“And so, we’ll see,” she said. “The scenarios are: we could leave that (m p) completely like it is this year, and that would be a good restraint on inflation but not so restrictive as to (undermine) the labor market.”

“We could find ourselves if inflation took off – not my modal outlook – but if it did we’d have to adjust the policy (rate) up,” Daly elaborated. “If we found that the labor market was faltering or that this conflict ended quickly and the inflation started to come back down we could adjust like we’d planned in the SEP (with the) one cut that was penciled in in the March SEP.”

She said that one projected rate cut is is “about where I was in March.”

But Daly said that “at this point I wouldn’t be surprised if…the market pricing is for zero cuts this year, and that’s with taking on board the oil price shock persists at least through the end of this year.”

Asked about the economic impact of the Iran war after the opening of the Strait of Hormuz was announced, Daly replied, “It’s too early to know whether this is a longer run persistent shock or a short-run shock that will dissipate if the conflict ends, Ultimately, it depends on the duration of the conflict.”

“If the conflict ends more quickly, then oil prices go down and we’re back on the interest rate path we were on before…,” she continued, before adding that a more persistent shock would have worse effects on the economy.

“Typically, you think of an oil price shock as having both inflation and growth effects,” Daly said, “but we’re not that energy dependent. in the United States, so it’s probably less on the growth effect and more on the inflation effect, because consumers are already paying higher pries at the pump.”

She said “the piece that I worry the most about is that consumers are …. already vulnerable. Persistently high oil prices chip away at their disposable income, and that means that at some point they’ll have to spend less on other goods and services. And that means ..dynamic of the economy slowing. So those the things we’re watching… “

Daly said she has joined many of her colleagues in raising her estimate of the “neutral” of interest – the real equilibrium short-term interest rates plus the Fed’s 2% inflation target.

“If you thought the neutral rate was 0.5% before the pandemic, now it looks more like 1.0% or a little higher, and if you add 2% inflation to that, that’s a 3% or a little north of 3% neutral rate of interest-rate in nominal terms,” she said, “and that’s where the consensus of the Committee is.”

“Some would have a higher neutral rate; a couple would have a lower rate if you look at their dot plot, but essentially around 3% or a little north of 3% is a good indication of where the neutral rate is,’ Daly said.

She described the current rate target (3.5% to 3.75%) as “slightly restrictive….We’re a little above that 3% area, but we’re right on the cusp…. We’re within the range.”

On Thursday, Williams echoed Powell’s stand-pat, wait-and-see approach Thursday after saying that “the Middle East conflict … has introduced substantial risks and heightened uncertainty<’which he is “watching closely.”

The FOMC vice chair identified “mixed signals” and “cross currents” in both labor and product markets in remarks to a Federal Home Loan Bank of New York symposium,

In the former, Williams said “much of the hard data point to a stabilization in the balance between supply and demand, while some of the soft data suggest a labor market that continues to gradually soften.”

“While labor market data are sending mixed signals, the price stability side of the Fed’s mandate is displaying some unusual crosscurrents, too,” he said. Though upbeat, he retained concerns about price pressures from both tariffs and the oil market.

“Over the next few quarters, the effects of tariffs on the inflation rate should begin to wane, creating some downward momentum in core inflation,” Williams said. “At the same time, developments in the Middle East are driving significant increases in energy prices, which are already lifting overall inflation. Assuming energy supply disruptions ease reasonably soon, energy prices should come down, and these effects should partially reverse later this year.”

“However,” he added, “the conflict could also result in a large supply shock with pronounced effects that simultaneously raises inflation—through a surge in intermediate costs and commodity prices—and dampens economic activity. This has begun to play out already….”

Williams pointed to “increasing disruptions related to the supply of energy and related goods. Not only are elevated energy prices showing up in the rising cost of fuel, but there are also pass-through costs in the form of higher airfares, groceries, fertilizer, and other consumer products.”

But he also noted “some positive trends. There are still no signs of significant second-round effects from tariffs spilling over to the rest of the economy. Underlying inflation excluding imported goods has been moving in the right direction.”

What’s more, Williams said that “survey- and market-based measures of inflation expectations—including those from the New York Fed’s Survey of Consumer Expectations—remain well anchored.”

His conclusion was that there’s no hurry to adjust monetary policy in any direction: “This is an unusual set of circumstances, but the current stance of monetary policy is well positioned to balance the risks to our maximum employment and price stability goals.”

Earlier in the week, much the same message came from other officials.

Chicago Fed President Austan Goolsbee said Tuesday that three months ago he “was on the more optimistic side that we could have the tariff impact on inflation be one and done” and “get back on the path to 2%,” enabling the Fed to make “multiple rate cuts in 2026.”

But “now with this [war], the longer this goes, the more it pushes that off,” he added.

Cleveland fed President Beth Hammack was more emphatic Wednesday, saying her “baseline is that we’re going to remain on hold for a good while.”

She did say, on CNBC, that “there’s two-sided risks to rates. I think there’s risks that we might need to be more accommodative or more restrictive, depending on how the data comes out.”

“But that’s why it’s a good time for us to stay patient and wait and see how the data flows through,” Hammack added.

A discordant note was struck, as usual, by Fed Governor Stephen Miran, but even he said Thursday that higher inflation has caused him to reduce the number of rate cuts he thinks would be appropriate.

“I might have three (rate ⁠cuts), I might have four, I haven’t made up my mind,” he said, adding that he will still support a rate cut at the April 29 FOMC meeting.

The hesitancy that has bred a “wait-and-see” mood at the Fed seems to be mirrored in the private sector, judging from a finding of the Fed’s beige book survey of economic conditions in the 12 Fed districts, prepared for review at the late April FOMC meeting, using information gathered through April 6: “The conflict in the Middle East was cited as a major source of uncertainty that complicated decision-making around hiring, pricing, and capital investment, with many firms adopting a wait-and-see posture.”

Even the Trump administration, which since inauguration has demanded that the Fed slash interest rates, has lightened up on the pressure lately. On Monday, Treasury Secretary Scott Bessent said the Fed is “doing the right thing by sitting and watching” how the Iran conflict plays out before cutting rates.

The next day, Bessent amended his stance somewhat, saying, “I think the Fed has been wrong on inflation, and the core inflation is coming down. I understand if they want to wait till the data is clearer, but that will mean that interest rates should come down a lot more.”

Trump himself has not changed his negative opinion of Powell, whom he has often called “Too Late Powell,” among other insults. Alluding to Powell’s plan to stay on as chair pro tem if his nominated successor Kevin Warsh is not confirmed by the U.S. Senate, the president said that in that case he would “fire him.”