Federal Reserve could signal no interest rate cuts this year in wake of Iran war
BNN Bloomberg
A key question hangs over the Federal Reserve’s two-day meeting that ends Wednesday: Will central bank policymakers still reduce short-term interest rates this year, now that the Iran war has sent oil prices higher and gas prices spiking? Or will they have to stand pat for months to see how the conflict plays out?
Fed Chair Jerome Powell is almost certain to announce Wednesday that the central bank has kept its key rate unchanged for the second straight meeting at about 3.6 per cent. But the Fed will also release a set of quarterly projections, and they could alter their forecast of one rate cut this year to zero. While such a change might seem minor, it would be a major course correction after 18 months of on-again, off-again rate cuts.
Wherever the Fed comes down, it is a particularly difficult time for policymakers to issue economic projections. The Iran war that the Trump administration launched Feb. 28 has already sent gas prices soaring and will push up inflation for at least the next month or two. The Fed will have to raise the inflation forecast it issues Wednesday from where it stood in December, when Fed officials projected inflation would fall to 2.6 per cent by the end of this year.
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Many economists expect the Fed will forecast that inflation will remain as high as three per cent even by late 2026. An increase of that magnitude could be hard to square with more interest-rate cuts.
At the same time, the jump in gas prices — if it is high enough and lasts long enough — could slow the economy, as more consumer spending is eaten up at the pump, leaving less money to be spent on other goods and services. As a result, unemployment could move higher later this year.
Oil tankers are crossing the Strait of Hormuz and Iran’s actions to choke traffic through the shipping route have not hurt the U.S. economy, White House economic adviser Kevin Hassett told CNBC on Tuesday, reiterating the Trump administration’s position that the war should be over in weeks, not months.
Canada’s annual inflation rate slowed in February to 1.8 per cent, but many economists believe the new Statistics Canada data may be the dip before a spike driven by oil prices and the war in Iran.
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Canadian and U.S. stock markets gained ground on Wednesday as oil prices fell and tech stocks rose on both sides of the border.
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Daily oil exports from the Middle Eastern Gulf, home to top exporter Saudi Arabia and other major producers, have dropped by at least 60 per cent in the week to March 15 compared to February due to disruptions and output cuts amid the U.S.-Iran war, according to shipping data and Reuters calculations.
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Member countries of the International Energy Agency could release more oil into the market later “as and if needed” after they have already agreed the largest-ever reserve release, Executive Director Fatih Birol said on Monday.
Oil prices are down, and stocks are up Monday, though such moves have been quick to reverse since the war in Iran began.
Statistics Canada says the annual rate of inflation dipped below two per cent in February as the end of last year’s federal “tax holiday” helped take some steam out of the yearly price comparisons.
Middle Eastern sovereign wealth funds and state-backed companies are unlikely to scale back renewable energy investments in Africa despite disruptions from the Iran war, analysts say, given the strong long-term economic and strategic reasons driving such funding.
Crude oil stayed above US$100 a barrel on Monday and Gulf countries reported more attacks by Iran as the war entered its third week, while share prices were mixed.