Kashkari says war with Iran limits Fed’s ability to provide rate guidance

By Michael S. Derby

May 3 (Reuters) – Minneapolis Federal Reserve Bank President Neel Kashkari said on Sunday that the longer the war with Iran continues, the greater the risks of higher inflation and economic damage, all of which limits the guidance the central bank should provide on rate policy at this time.

In an appearance on the CBS television show “Face the Nation,” Kashkari said he was “very focused” on the Iran war and its impact on inflation and economic demand amid the ongoing closure of the Strait of Hormuz, a bottleneck for 20% of the world’s oil and gas supply.

The war, which began when US President Donald Trump and Israel launched airstrikes against Iran on February 28, has caused a massive rise in energy prices around the world and worsened the poor inflation environment in the United States.

Given the risks and uncertainty surrounding all aspects of the war, Kashkari said the Federal Reserve might even have to raise rates.

“I don’t feel comfortable pointing out that a rate cut is on the cards. You know, we could be in worse scenarios, we could have to go in the other direction,” he said.

Kashkari was part of an unusually large dissident wave at the most recent meeting of the Federal Open Market Committee, voting against language the institution used in its monetary policy statement.

FED DISSENTS

The Federal Reserve on Wednesday held its target interest rate range steady at 3.5% to 3.75% and withheld language indicating that officials still collectively viewed the central bank’s next move “as a rate cut.”

Kashkari was joined by leaders of the Cleveland and Dallas regional Federal Reserve Banks against that guidance. Another Federal Reserve official, Governor Stephen Miran, dissented in favor of a rate cut.

The Fed’s three regional dissidents supported keeping rates steady and in later comments said interest rates may need to rise or fall depending on how the war affects the economy.

The Federal Reserve traditionally looks at things like energy price shocks as they generally subside, but some officials have noted that the current problems come on top of years of inflation that overshoots the Fed’s target.

That means the central bank might have to raise rates to contain inflation. At the same time, however, large increases in energy also depress demand by hurting consumers’ ability to spend. That, in turn, could cause the Federal Reserve to hold rates steady or even cut rates in an attempt to protect the labor market.

In a television appearance Saturday, Chicago Federal Reserve President Austan Goolsbee called the latest U.S. inflation data “bad news.” Against the Federal Reserve’s 2% target, headline inflation as measured by the personal consumption expenditures price index rose 3.5% year over year in March.

Adding to the uncertainty around the outlook for monetary policy is a changing of the guard at the top of the Federal Reserve, with Kevin Warsh on track to succeed current Chairman Jerome Powell when his term ends at the end of this month. Warsh nodded toward a looser rate policy as he sought the chairmanship, but events and the disposition of current Fed officials may thwart that agenda.

OIL PRICE OUTLOOK

The United States and Israel suspended their bombing campaign against Iran four weeks ago, but appear no closer to a deal to end the war that has raised concerns about the possibility of a broader global economic downturn.

Kashkari was not optimistic about a quick return to normality, saying even the best-case scenario for war would point to prolonged disruptions.

“I spoke to the CEO of a Minnesota-based global company that has supply chains around the world last week, and they have estimated that even if the Strait reopened today, it would probably take six months for their supply chains to return to anything resembling normal,” Kashkari said.

In contrast, Treasury Secretary Scott Bessent expressed confidence that energy prices would fall once the war was resolved.

In an appearance on Fox News’ “Sunday Morning Futures,” Bessent said the war, as well as other developments in oil production dynamics, “give me a lot of optimism that oil prices on the other side of this conflict are going to be much lower than they were at the beginning, or at the beginning of the year, or anytime in 2020-2025.”

Bessent said futures markets are pricing in lower energy prices later this year and that Iran was not having much success trying to collect tolls on ships transiting the Strait of Hormuz, largely due to the U.S. naval blockade against Iran.

Bessent said the United States is a “big winner” in the energy crisis because of its ability to export oil, which is only limited “by its ability to load fuel on ships and ship it overseas.”

Analysts at Barclays said in a note on Friday that the rise in energy prices had so far been relatively contained, but could soon ease. Further disruptions to the flow of energy would drive inventories of key fuels to critically low levels, they said, adding that “when those tipping points are reached, prices could rise further.”

(Reporting by Michael S. Derby; editing by Scott Malone and Nia Williams)