All eyes are on the Federal Reserve on Wednesday afternoon when the central bank is expected to hold interest rates steady for the second straight policy meeting this year.
The bigger question is how the FOMC is assessing the impact of the Iran oil price shock on the economy and inflation — and thus the outlook for setting interest rates.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
Fed Chair Jerome Powell “will most likely emphasize that significant uncertainty remains about how recent events could impact the economy and monetary policy,” said Matt Luzzetti, chief US economist for Deutsche Bank. “We suspect Powell will note that they are watching events closely and that the primary transmission channel is through financial markets and especially oil prices.”
With inflation now having spent five years above the Fed’s 2% inflation goal, the latest geopolitical uncertainty is likely to reinforce a “wait and see” approach.
“In the fog of current geopolitical tensions, it would be surprising for Powell to send any strong signals about the near-term policy outlook,” Luzzetti added.
Fed officials in recent weeks have said the Iran conflict raises uncertainty, potentially pushing back the timeline for rate cuts under consideration for later this year.
While some could stick to their thesis of lowering rates, others who have raised caution around inflation could dig in further, pushing off the notion of any cuts into next year.
Officials will release the quarterly “dot plot” — a graph that charts how many interest rate cuts each individual Fed member sees for this year and next. In December, the median of individual officials’ projections was one rate cut this year. Many expect that to hold amid the uncertainty of the Iran war.
Inflation on a “core” basis, which excludes volatile oil and food prices, was already looking sticky before the Iran crisis.
The minutes from the January policy meeting — before the Iran war — noted that several Fed officials indicated they would have supported a two-sided description of the Fed’s future interest rate decisions, reflecting the possibility that raising rates could be appropriate if inflation remains above the central bank’s 2% target. With the spike in oil prices, those members are likely to support making that change to the policy statement, but there may not be enough overall support from the committee.
Many expect the Fed’s outlook for headline inflation to be revised up, but are looking to see whether core inflation is also raised for the year.