Written by: He Hao

Source: Wall Street Journal

On Wednesday, Nick Timiraos, a well-known financial journalist referred to as the "New Federal Reserve News Agency," wrote that the ceasefire between the United States and Iran provides an opportunity to alleviate the latest serious threats facing the global economy. But for the Federal Reserve, this may just be swapping one problem for another: a type of energy shock lasting just long enough to push up inflation but not severe enough to destroy demand, leading to interest rates staying unchanged for a long time.

Timiraos cited the minutes of the Federal Reserve's meeting from March 17 to 18, released on Wednesday, which stated:

The minutes emphasized that the war in Iran has not made the Federal Reserve reluctant to cut interest rates but has made its already cautious position more complex. Before the outbreak of the Iran conflict, the path to rate cuts had already narrowed. The U.S. labor market had stabilized enough to alleviate recession worries, while progress in inflation returning to the Federal Reserve's 2% target had stalled.

The March meeting minutes stated that partly due to the risk of prolonged war, the vast majority of attendees noted that the progress of inflation returning to the target might be slower than previously expected and believed that the risk of inflation remaining above the committee's target had increased.

At the March FOMC meeting, the Federal Reserve kept the benchmark interest rate unchanged in the range of 3.5% to 3.75%, marking the second pause following three consecutive rate cuts in the last few months of 2025.

Timiraos stated that if the risk of the Iran conflict spreading to hinder economic growth and pushing the economy into recession is the final and strongest reason for resuming interest rate cuts, then ironically, the end of the war could make it harder for the Federal Reserve to ease policy in the short term:

This is because the ceasefire eliminates the worst-case scenario—namely, severe price surges disrupting supply chains and destroying demand—but it may reduce the extent of inflation risk less than it reduces the extreme scenario. Energy and commodity prices that rose during the conflict may not fully fall back, and with the optimism brought by the ceasefire, as seen in the market rise on Wednesday, financial conditions are loosening.

Once the risk of severe demand destruction is eliminated, what remains is an inflation problem that has not been completely resolved, and the recent rise in energy prices may bring some "echo effect," meaning that even if the ceasefire holds, the influence will continue, though it will be milder than before.

Timiraos quoted Marc Sumerlin, managing partner of economic consulting firm Evenflow Macro, stating: "As the probability of recession decreases, the probability of inflation increases because price pressures persist, but demand destruction is not as severe."

Timiraos pointed out that at the same time, the ceasefire also lowers the likelihood of another, less probable but more destructive risk—namely, sustained surges in energy prices that would force the Federal Reserve to consider raising rates.

Timiraos noted that the minutes of the Federal Reserve's March meeting showed that officials were weighing the dual risks brought by the war: on one hand, possibly leading to a sudden deterioration of the job market, necessitating rate cuts; on the other hand, possibly resulting in long-term high inflation, necessitating rate hikes.

In the post-meeting forecasts, most officials still expect at least one rate cut this year. However, the minutes emphasized that this expectation depends on whether inflation returns to the target. The minutes stated that two officials had already postponed their judgment on when they deemed a rate cut appropriate due to the lack of recent improvement in inflation.

The Federal Reserve's post-meeting statement still suggested that the next rate action is more likely to be a downward adjustment rather than an upward one. But the minutes showed that the number of officials believing that this "bias" could be lifted had increased compared to the January meeting. The minutes noted that if the wording of the statement were adjusted, it would mean that if inflation continues to be above target, raising rates could also be an appropriate choice.

Timiraos stated that the Federal Reserve's current stance reflects a "layered problem," quoting remarks made by Federal Reserve Chairman Powell recently:

Powell stated last week that after the pandemic, the Russia-Ukraine conflict, and last year's tariff increases on imported goods, the Federal Reserve is facing its fourth supply shock in recent years.

The Federal Reserve's policy has enough room to observe and assess economic impacts, but Powell also warned that a series of one-time shocks could undermine public confidence in the return of inflation to normal levels. The Federal Reserve is highly attentive to this risk because it believes that inflation expectations could "self-fulfill."

Timiraos pointed out that even before this week's ceasefire announcement, current and former Federal Reserve officials had indicated that even if the conflict is resolved quickly, it does not mean that policy will return to normal immediately. Part of the reason is that the world has already seen how easily the Strait of Hormuz can be blocked, and this vulnerability may be factored into energy prices and corporate decisions for many years to come. Some geopolitical analysts doubt whether the ceasefire can bring energy prices completely back to pre-war levels. Iran has a strong motivation to maintain high oil prices to obtain reconstruction funds and maintain influence over its Gulf neighbors.

Timiraos quoted St. Louis Federal Reserve President Musalem's remarks last week, stating that even if the conflict ends in the coming weeks, he would be concerned about the "ripple effects" that may still push prices up after the supply chain recovers. "I have been looking for these echoes because even if the war ends quickly, restoring damaged capacity takes time."

Timiraos stated that the Federal Reserve's cautious attitude echoes a framework proposed by then-Governor Bernanke over two decades ago: central banks should decide how to respond to oil price shocks based on the inflation level at the time the shock occurs:

If inflation is already low and expectations are stable, policymakers can "ignore" the inflation pressures brought by rising energy prices; but if inflation is already above target, then the risk of supply shocks further disrupting inflation expectations requires tighter policies, and some officials believe this is precisely where the Federal Reserve currently is.