Fed likely to hold interest rates as US-Iran war rages
What's the story
The US Federal Reserve is likely to keep interest rates unchanged at its upcoming policy meeting, owing to the ongoing conflict in the Middle East. The two-day meeting, starting Tuesday, could be Chairman Jerome Powell's last as head of the independent institution. The Fed is expected to maintain its target range for interest rates between 3.50% and 3.75%, extending a pause since January this year.
Economic impact
Energy shock impacting US economy
The Fed's decision comes as high energy prices and supply chain disruptions continue to plague the economy. Kenneth Kim, a senior economist at KPMG, said there's certainly an "energy shock" that's still impacting both consumers and businesses. He added that oil and gasoline prices are still high despite having peaked, which could affect the Fed's policy decisions in the future.
Policy balance
Fed's dual mandate under pressure
The Fed has a dual mandate of maintaining price stability and low unemployment. However, current conditions are pulling officials in different directions. Heather Long, Chief Economist at Navy Federal Credit Union, expects Powell to be "non-committal" on the path of rates as the full impact from the war on Iran is still unknown. Analysts will be watching if the Fed hints at possible rate hikes in its post-meeting statement.
Inflation concerns
Inflation at highest level in nearly 2 years
The ongoing conflict has also led to a spike in energy costs, pushing US consumer inflation to its highest level in nearly two years at 3.3% in March. Fed Governor Christopher Waller had previously supported lower rates to support employment but hinted this month that a prolonged conflict could make it difficult for the central bank to cut rates this year.
Leadership transition
Political pressure mounting on Powell
The Fed is also under political scrutiny, with President Donald Trump openly wanting lower interest rates and regularly criticizing Powell for not cutting them aggressively. Trump has even tried to remove Fed Governor Lisa Cook over alleged mortgage fraud. Meanwhile, his pick for new Fed chairman Kevin Warsh has faced hurdles in confirmation due to a Justice Department probe into the Fed and Powell.