The sooner the Iran War ends, the sooner the Federal Reserve can consider cutting interest rates — something the central bank and traders had expected at the beginning of the year.
Fed officials have been preaching caution about the impact of oil spikes, inflation and tariffs on the U.S. economy since the conflict began at the end of February, tossing aside previous rate-cut forecasts for 2026.
The Iran War is likely to drive up inflation in the near term, Fed Governor Christopher Waller said April 17 in prepared remarks.
But he added that monetary policymakers would be open to cutting interest rates again later this year if peace in the Middle East was reached in a timely manner.
“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,’’ Waller said.
The Iran War also caused Fed Governor Stephen Miran to adjust his long-held position of four multiple interest-rate cuts this year.
While traders are pricing in no rate cuts in 2026, and the Fed’s own consensus favors one cut, Miran has adjusted his outlook to three,Yahoo Finance reported April 16.
“The energy developments have…increased the risks of higher inflation further out if the energy crisis remains in place for a long period of time or gets worse,” Miran said.
Fed’s Williams addresses interest-rate path
New York Fed President John Williams, a close ally to Fed Chair Jerome Powell, concurred that the economic challenges from the Iran War could resolve later this year if supply disruptions in the energy market resolve relatively soon.
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But he added that the central bank’s current “wait-and-see” approach to interest-rate cuts are appropriate given additional risks to the Fed’s dual mandate.
He also warned that the Middle East conflict could lead to a more difficult dynamic in which prices are rising at the same time that the U.S. economy is slowing.
“This has begun to play out already,”Williams said April 16, according to The Wall Street Journal.
Federal Reserve Bank of New York via FRED®
The FOMC votes on interest rates later this month
President Donald Trump, throughout his second administration, has blasted Powell for not slashing interest rates to 1% or lower over the last 14 months.
He attacked Powell as a “moron” and other personal and professional insults (“Too Late”).
The Federal Funds Rate is currently 3.50% to 3.75% after the policy-making Federal Open Market Committee held the rate steady after the last two meetings.
As I reported, it cut the funds rate by three 25 basis points in its last meetings of 2025.
Related: JPMorgan delivers blunt message on interest rate cuts
The next FOMC meeting is April 29.
CME Group’s FedWatch Tool estimates a near 100% probability the panel will vote to continue to hold rates steady.
The Fed’s March median Summary of Economic Projections or “dot plot” calls for a single 25 basis-point-rate cut in 2026, and an additional 25 basis-point-cut in 2027, the same as the December 2025 forecast.
Powell noted at the March FOMC press conference the rate cut was not guaranteed, especially if the projected decrease in inflation doesn’t occur.
Markets were pricing in about a 1 in 3 chance of a reduction this year, according to the CME Group on April 15.
Fed faces risks to both sides of its mandate
Even before the outbreak of the Iran War, the Fed faced a dilemma from worrisome risks to both sides of its congressional mandate: unemployment rates and sticky inflation from tariffs.
The Fed’s dual congressional mandate requires it to balance full employment and price stability.
- Lower interest rates support hiring but can fuel inflation.
- Higher rates cool prices but can weaken the job market.
The two goals often conflict, operate on different timelines and are influenced by unpredictable global events like pandemics and wars.
Bloomberg reported that several Wall Street firms say inflation will now be closer to 3% this year than the Fed’s 2% target, eating into disposable incomes and keeping a lid on hiring.
That’s a shift from what was supposed to be a strong economic year as the inflationary shock of President Donald Trump’s tariffs faded and stimulus from tax cuts kicked in.
IMF Chief Economist Pierre-Olivier Gourinchas said that a prolonged war may force more aggressive central bank tightening even as growth weakens.
“Rising oil and commodity prices could lead to unanchored inflation expectations,” he told Reuters April 14.
Related: Treasury Secretary Bessent just dropped a Fed rate-cut bombshell
