Nick Timiraos: A U.S.-Iran ceasefire deal could keep the Federal Reserve interest rates unchanged for longer

Gate News update: On April 8, “Fed megaphone” Nick Timiraos said in a post on April 9 that the ceasefire between the U.S. and Iran offers an opportunity to address the serious threat the current situation poses to the global economy. But for the Federal Reserve, this may be only a case of swapping one problem for another: energy prices continue to fluctuate, enough to keep inflation at relatively high levels, but not enough to significantly disrupt demand, thereby allowing the “rates on hold” situation to last longer.

In the Federal Reserve’s March meeting minutes, it was emphasized that this war is not the main reason the Fed is reluctant to cut rates; rather, it has made the already quite cautious stance of the Fed even more complicated. Even before the outbreak of hostilities, the path to rate cuts had already narrowed. The labor market has stabilized, easing concerns about an economic downturn, while progress toward achieving the Fed’s 2% inflation target has stalled.

At its March meeting, the Federal Reserve did not change interest rates, in part because it was concerned about the risks of the war dragging on. Escalation of the conflict could weigh on economic growth and increase the risk that the economy falls into a recession—this was the last and strongest rationale for restarting rate cuts.

Nick Timiraos noted that the end of the war could, in the short term, make it harder rather than easier for the Federal Reserve to implement easing policies. This is because the ceasefire agreement eliminates the worst economic conditions—severe price increases that would disrupt supply chains and damage demand—which can be said to be more important than eliminating the risk of new inflationary pressures.