MNI FED WATCH: On Hold To Assess Inflation Threat From War

The Federal Reserve is expected to stay on hold this week as officials debate whether tariffs and the weeks-long Iran war have discernably altered the inflation outlook and might eventually require more restrictive policy rates.

At its last meeting, some FOMC members expressed a desire to shift to "two-sided guidance" -- signaling that the next move could be either a hike or a cut -- but the committee made no change to its statement. It has also kept benchmark rates at 3.5%-3.75% since December. 

Former Fed officials and staffers told MNI policymakers are likely to again leave that guidance untouched, because the economy has shown resilience to the oil shock and as the Fed prepares to welcome a new leader, Kevin Warsh, who has hinted at a predilection for lower rates. (See: MNI INTERVIEW: Fed Rate Guidance Muddled By Chair Transition)

"We're in a much more 'could go either way' kind of situation than we began the year," former Atlanta Fed President Dennis Lockhart told MNI, adding chances are rising that the Fed will end up leaving interest rates on hold the rest of the year. (See: MNI INTERVIEW: Chances Rise Fed On Hold Through 2026 -Lockhart)

TWO-SIDED RISKS

As the war enters its third month, Fed officials see intensifying price pressures against a background of resilient consumer spending, robust business investment and a still-healthy though fragile labor market. 

Core PCE inflation came in at 0.37% in February and 3.0% for the 12-month rate, having risen from a low of 2.6% in April 2025 before President Trump's tariffs. 

A record jump in gasoline prices propelled headline CPI to a two-year high of 3.3% in March from 2.4% the previous month, and higher energy prices are expected to feed through to a range of other prices. (See: MNI INTERVIEW: Fed Has Little Room to Look Past Iran Inflation)

An end to the war could allow conditions to normalize by late this year or early next, but the range of outcomes remains unusually wide and include much more adverse scenarios, former Cleveland Fed President Loretta Mester told MNI. (See: MNI INTERVIEW: Oil Shock Requires Vigilant Fed - Mester) 

STABLE JOBS

That extends to risks to the labor market which has enjoyed some stability since late last year. The unemployment rate at a low 4.3% masks a fragile "no hire, no fire" equilibrium that could fracture quickly under geopolitical events. (See: MNI INTERVIEW: US Jobs Market In Fragile Equilibrium - Sahin)

“The concern is that firms are between two thresholds -- not hiring, but also not firing. If something shifts, they could all move in the same direction," Fed adviser Aysegul Sahin told MNI. (See: MNI INTERVIEW: US Jobs Market In Fragile Equilibrium - Sahin)

Retail sales were higher than expected in March, along with upward revisions to the rest of the first quarter, but real GDP growth is only tracking a tepid recovery after a below-trend 0.5% in the fourth quarter. (See: MNI INTERVIEW: Iran Shock Bites Resilient Services Growth-ISM)

As the energy cost spike erodes employment conditions and consumer spending, the Fed could resume rate cuts by year-end, Mickey Levy, outside adviser to Fed banks, told MNI. (See: MNI INTERVIEW: Fed Will Have Room To Cut Later This Year-Levy)