The U.S. economy’s ability to rebound from dual inflation shocks of tariffs and the Iran War will be key to future interest-rate policy, and neither is clear at the moment, according to a top Fed official.
A patient approach to monetary policy is required as Fed officials watch incoming data for clues about where the economy is heading, Cleveland Federal Reserve President Beth Hammack said April 15.
Hammack, a voting member of the policymaking Federal Open Market Committee, told CNBC April 15 that the central bank should keep interest rates on hold as conditions evolve.
“All of these successive supply shocks are hard to think about how we’re supposed to handle those from monetary policy perspective,” she said.
“Normally, you like to look through these types of supply shocks, but when it’s coming on the back of already-elevated inflation, it may not be the same as it would be had we been entering this period at low and stable inflation,” she added.
She also noted that prior to the war, there were concerning risks to the employment side of the Fed’s mandate that appeared to be stabilizing earlier this year.
Hammack said the labor market is “roughly in balance,” though she called it a “curious balance,” considering the low level of job creation along with modest increases on the supply side.
FOMC votes on interest rates later this month
President Donald Trump, throughout his second administration, has blasted Fed Chair Jerome Powell for not slashing interest rates to 1% or lower over the last 14 months.
He attacked Powell as a “moron” and hurled other personal and professional insults, such as “Too Late” Powell.
More Federal Reserve:
- J.P. Morgan pushes back on Fed’s 2026 rate-cut forecast
The federal funds rate is currently 3.50% to 3.75% after the Federal Open Market Committee held the rate steady after the last two meetings.
As I reported, it made three quarter-point rate cuts in its last meetings of 2025.
The next FOMC meeting is April 29.
CME Group’s FedWatch Tool estimates a near 100% probability the panel will vote to continue to hold rates steady.
The Fed’s March median Summary of Economic Projections or “dot plot” calls for a single quarter-point rate cut in 2026 and an additional quarter-point cut in 2027, the same as the December 2025 forecast.
Powell noted at the March FOMC press conference that the rate cut was not guaranteed, especially if the projected decrease in inflation doesn’t occur.
Markets were pricing in about a 1-in-3 chance of a reduction this year, according to the CME Group on April 15.
Federal Reserve Bank of New York via FRED®
Fed faces risks to both sides of its mandate
Even before the outbreak of the Iran war, the Fed faced a dilemma from worrisome risks to both sides of its congressional mandate: unemployment rates and sticky inflation from tariffs.
The Fed’s dual congressional mandate requires it to balance full employment and price stability.
- Lower interest rates support hiring but can fuel inflation.
- Higher rates cool prices but can weaken the job market.
The two goals often conflict, operate on different timelines and are influenced by unpredictable global events such as pandemics and wars.
Several Wall Street firms say inflation will now be closer to 3% this year than the Fed’s 2% target, eating into disposable incomes and keeping a lid on hiring, Bloomberg reported March 25.
That’s a shift from what was supposed to be a strong year in 2026 as the inflationary shock of President Donald Trump’s tariffs faded and stimulus from tax cuts kicked in.
IMF Chief Economist Pierre-Olivier Gourinchas said that a prolonged war may force more aggressive central bank tightening, even as growth weakens.
“Rising oil and commodity prices could lead to unanchored inflation expectations,” he told Reuters April 14.
Bessent warms to surprising “wait-and-see” approach to rate cuts
U.S. Treasury Secretary Scott Bessent, in a stunning turnaround for the Trump administration, says he could understand if Federal Reserve officials want to wait to observe economic developments related to the Iran war before they resume cutting interest rates.
But the secretary added that he was quite confident U.S. core inflation would continue to decline despite the war, repeating his call for the Fed to lower interest rates, Reuters also reported April 14.
Just the day before, Bessent said the U.S. central bank should “wait and see” before deciding whether to lower interest rates amid the war in Iran, Semafor indicated.
“Do I think rates should be lowered? Eventually. I think now that we have to wait and see,” Bessent said at a Semafor event. “But I think as we went into January [and] came out of January and February — the economy was very strong.”
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