“The New Fed Wire”: The Fed’s rate-cut prospects remain bleak, regardless of whether a ceasefire agreement is reached.

By He Hao

Source: WallStreetCN

On Wednesday, Nick Timiraos—a prominent financial journalist widely dubbed the “New Fed Watch”—wrote that the ceasefire between the U.S. and Iran presents an opportunity to ease the latest severe threat facing the global economy. Yet for the Federal Reserve, it may merely swap one problem for another: an energy shock of just the right duration—long enough to push inflation higher, yet not severe enough to meaningfully dent demand—thereby keeping interest rates unchanged for an extended period.

Timiraos cited the minutes from the Federal Reserve’s March 17–18 meeting, released Wednesday:

The minutes emphasized that the Iran conflict has not made the Fed reluctant to cut rates; rather, it has further complicated an already cautious stance. Even before the outbreak of hostilities with Iran, the path toward rate cuts had narrowed. The U.S. labor market has stabilized sufficiently to allay recession concerns, while progress toward the Fed’s 2% inflation target has stalled.

The March minutes stated that, partly due to risks of protracted war, a majority of participants indicated that progress toward the inflation target could be slower than previously anticipated and that the risk of persistently elevated inflation—above the Committee’s target—had risen.

At its March FOMC meeting, the Fed held its benchmark interest rate steady in the 3.5%–3.75% range—the second pause after three consecutive cuts in late 2025.

Timiraos noted that if escalation of the Iran conflict—and the resulting drag on growth and heightened recession risk—was the final, strongest rationale for resuming rate cuts, then paradoxically, the end of the war could make it harder for the Fed to ease policy in the near term:

That is because the ceasefire eliminates the worst-case scenario—namely, severe price spikes disrupting supply chains and crushing demand—but the extent to which it reduces inflationary pressures may fall short of how much it diminishes extreme downside risks. Energy and commodity prices that rose during the conflict may not fully reverse, and financial conditions are already easing amid optimism triggered by the ceasefire—evidenced, for example, by Wednesday’s market rally.

Once the risk of severe demand destruction is removed, what remains is an unresolved inflation problem—and recent energy price increases may generate lingering “echo effects” that persist even under a sustained ceasefire, albeit at a milder intensity than before.

Timiraos quoted Marc Sumerlin, Managing Partner at macroeconomic advisory firm Evenflow Macro: “As the probability of recession declines, the probability of persistent inflation rises—because price pressures remain, but demand destruction is less severe.”

Timiraos pointed out that the ceasefire also lowers another, less likely but more disruptive risk: sustained surges in energy prices that might compel the Fed to consider hiking rates.

He noted that the March FOMC minutes revealed officials were weighing the war’s dual risks: on one hand, a sudden deterioration in the labor market potentially warranting rate cuts; on the other, entrenched inflation potentially requiring hikes.

In post-meeting projections, most officials still anticipated at least one rate cut this year. Yet the minutes stressed that this expectation hinged on whether inflation resumed its descent toward the target. The minutes noted that two officials had already delayed their judgment on when a cut would be appropriate, citing the recent lack of improvement in inflation.

The Fed’s post-meeting statement continued to signal that the next move in rates was more likely to be downward than upward. However, the minutes showed that, compared with the January meeting, the number of officials open to removing this “bias” had increased. The minutes observed that revising the statement’s wording would imply that rate hikes could become appropriate if inflation remained above target.

Timiraos said the Fed’s current posture reflects a “layered problem,” citing recent remarks by Fed Chair Jerome Powell:

Powell said last week that, following the pandemic, the Russia-Ukraine war, and last year’s tariff hikes on imported goods, the Fed is now confronting its fourth supply shock in recent years.

The Fed retains sufficient policy space to wait and assess the economic impact—but Powell also warned that a string of one-off shocks could erode public confidence in inflation returning to normal. The Fed closely monitors this risk, as it believes inflation expectations can become “self-fulfilling.”

Timiraos noted that even before this week’s ceasefire announcement, current and former Fed officials had said that a swift resolution to the conflict would not mean an immediate return to normal policy. One reason is that the world has now witnessed how easily the Strait of Hormuz can be blocked—a vulnerability that may be priced into energy markets and corporate decision-making for years to come. Some geopolitical analysts doubt whether the ceasefire will allow energy prices to fully revert to pre-war levels. Iran has strong incentives to sustain higher oil prices—to finance reconstruction and preserve influence over its Gulf neighbors.

Timiraos cited St. Louis Fed President Alberto Musalem’s remarks last week: even if the conflict ends within the coming weeks, Musalem said he would monitor “ripple effects” that could continue pushing up prices even after supply chains recover. “I’ve been looking for these echoes, because restoring damaged capacity takes time—even if the war ends quickly.”

Timiraos noted that the Fed’s caution echoes a framework proposed over two decades ago by then-Fed Governor Ben Bernanke: central banks should tailor their response to oil-price shocks based on the prevailing level of inflation at the time the shock occurs:

If inflation is already low and well-anchored, policymakers may “look through” the inflationary pressure stemming from higher energy prices; but if inflation is already above target, the risk that a supply shock further destabilizes inflation expectations calls for tighter policy—and some officials believe this is precisely the situation the Fed faces today.