Though the market has been betting on an interest rate cut this year, the path for the Fed may not be so clear.
“[Three months ago] I was on the more optimistic side that we could have the tariff impact on inflation. Be one and done. We’ll get back on the path to 2%. We could have multiple rate cuts in 2026 … Now with this [war], the longer this goes, the more it pushes that off,” Chicago Federal Reserve Bank president Austan Goolsbee told Yahoo Finance at the Semafor World Economy conference on Tuesday.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
At its most recent meeting in mid-March, the Federal Reserve chose to maintain interest rates at a target range of 3.50% to 3.75%.
The decision highlighted a wait-and-see posture as the Fed attempts to balance a slower-growth job market against a sharp spike in energy prices. The just-released Fed minutes showed officials think it’s too early to evaluate the economic and inflationary impact of the Middle East conflict. But they deemed it “prudent” to monitor developments before adjusting policy.
Goolsbee said the Fed is also watching for signs of stagflation, an economic condition of high stagnant growth, high unemployment, and high inflation. If the US enters stagflation, the central bank will have to evaluate each condition to see if rates need to be cut or raised.
Read More: What is stagflation, and how does it impact you?
“Figure out which side is getting worse, more, and how long do we think each side being out of alignment is going to last? That’s what we’ll have to do if this keeps getting worse,” he explained.
The backdrop since the Fed’s last meeting has changed considerably.
After peaking near $120 a barrel amid Operation Epic Fury, oil prices plunged sharply early last week. Then they spiked later in the week and into Monday on concerns the US ceasefire with Iran wasn’t holding. President Trump also moved to block the Strait of Hormuz.
Oil prices remain all over the map today as the Iran situation remains precarious.
Still, regular unleaded gas prices hit a national average of $4.16 a gallon on April 8, the highest since the summer of 2022.
In early April, the University of Michigan’s Consumer Sentiment Index tanked to a record low of 47.6, down from 53.3 in March. This is the lowest reading since the survey began in 1952, with consumers calling out the Iran conflict and soaring gas prices as the main reasons for their pessimism.
The Labor Department on Friday said that its Consumer Price Index (CPI) was 3.3% higher in March than a year ago.