Washington
CNN
—
President Donald Trump has repeatedly demanded the Federal Reserve slash interest rates. But Fed officials have stood pat, waiting to see how his administration’s sweeping policy changes affect the economy first.
Now there’s another factor that could delay a rate cut: the conflict between Israel and Iran.
On Friday, Israel struck at Iran’s nuclear and military sites in an unprecedented attack that sent global oil prices surging. Investors and analysts fretted that a spiraling conflict could send inflation rising across the world, including in the United States. And that could give the Fed further pause at a two-day policy meeting next week.
“If this situation were to deepen further and oil prices were to stay durably higher, it would just add to the challenges that the Fed is already facing with the potential for tariffs to push up inflation,” Robert Sockin, senior global economist at Citigroup, told CNN.
“Fed officials have emphasized that they’re not in a rush to cut rates because they don’t know how the tariffs will exactly play through into the economy, but if you have even more upside risks to inflation, you’re probably looking at an end-of-year rate cut only,” he added.
Trump’s policy shifts on everything from trade to immigration could all raise unemployment and jack up prices. And his frenetic back-and-forth on tariffs has made it complicated for forecasters to estimate with any confidence what the economy could look like in the future.
Fed rate-setters have already said they want to see how Trump’s changes pan out in the economy. With renewed Middle East tensions, that makes even more sense, experts told CNN.
“Monetary policy is not well-suited to deal with geopolitical shocks, but all this does mean that the Fed will be even more cautious,” said John Velis, Americas macro strategist at BNY Mellon.
The Fed, for now, has time to wait before cutting rates again for one key reason: the resilience of the US labor market.
In May, employers added a better-than-expected 139,000 jobs as the unemployment rate held steady at a low 4.2%, according to the Labor Department. First-time claims for unemployment benefits remain relatively low and job openings unexpectedly increased at the end of April, government figures show.
In other words, Americans still have jobs — and the Fed can afford to wait.
Instead, the Fed could cut if it sees the economy crumbling, even if oil prices are still high — what investors call a “bad news” rate cut.
“We’ll see how long oil prices remain elevated, which could lead to inflation at the headline level moving up if the conflict widens across the Middle East,” Jay Bryson, chief economist at Wells Fargo, said in an interview with CNN.
“But by the end of the summer, you’ll likely see weaker job growth, and we know that there’s going to be a number of federal employees who took a buyout rolling off payrolls by November, so you could even get a negative number by then,” he said.
Investors are betting on a rate cut in October, according to futures. They’ll get the Fed’s own view soon enough: Officials will release a new set of projections next week.
