Fed officials wary on cuts amid oil shock

Federal Reserve Governor Christopher Waller said on April 17 that the war involving Iran and resulting disruption in the Middle East are likely to push US inflation higher in the near term and complicate decisions on interest rate cuts. He pointed to elevated energy prices and constraints in the Strait of Hormuz as key risks for inflation and growth.

In prepared remarks based on a speech at Auburn University in Alabama, Waller said he expects the overall personal consumption expenditures (PCE) price index to be about 3.5% in March, well above the Federal Open Market Committee’s (FOMC) 2% target. He described the outlook as highly uncertain, given the course of the conflict and its impact on energy markets and supply chains.

Waller explained that gasoline prices have risen by more than one-third since the conflict began, with a national average of $4.10 per gallon as of the day before his speech. Brent crude oil (UKOIL), he noted, has moved from $61 per barrel at the start of 2026 to around $95 in recent days, with the March consumer price index showing a 10.8% jump in its energy component and boosting 12‑month headline inflation to 3.3% and core inflation to 2.6%.

Waller said he remains cautious about cutting interest rates now, regardless of whether the Iran war ends soon. He emphasized that a sequence of “transitory shocks” from tariffs and now higher energy prices requires policymakers to be more vigilant, as repeated shocks can keep inflation elevated for an extended period.

He outlined two scenarios. If the cease-fire holds and the Strait of Hormuz reopens, he would look through the temporary effect of higher energy prices on inflation. In that case, he sees underlying inflation continuing to move toward 2% and would be more inclined to consider cuts later in 2026 to support the labor market, once the outlook is steadier.

In a less favorable scenario where the Strait remains constrained and energy prices stay high, Waller warned that inflation could become embedded across a wide variety of goods and services, with supply chain disruptions and slower real activity and employment. Facing both higher inflation and a weaker labor market, he said the Fed might need to maintain the policy rate at its current target range if inflation risks dominate.

Waller highlighted that slower population growth, driven by a sharp drop in net immigration and ongoing population aging, has pushed labor force growth close to zero. He said this means very little or no net job creation is now needed to keep the unemployment rate steady, a break from past norms.

He cited recent payroll volatility, with months of both gains and losses, and characterized the labor market as vulnerable but hard to interpret using traditional signals. Employers, he said, are hesitant both to hire and to fire amid uncertainty, leaving them exposed to shocks that could trigger larger job reductions.

Waller noted that underlying inflation, excluding tariff effects, had been running close to 2% through February, and that before the conflict he was more concerned about labor market weakness than inflation. The oil shock has shifted attention back to inflation risks, especially if it alters inflation expectations.

Also on April 17, San Francisco Fed President Mary Daly described interest rates as being in a “very good place” and “slightly restrictive.” She said the future path for rates depends on how long the Middle East conflict lasts and how inflation responds.

Daly said the Fed could leave rates where they are to restrain inflation, could raise them if inflation were to accelerate, or could return to a path of cuts if the conflict ends quickly and oil prices fall. Waller’s remarks are expected to be among the last on monetary policy before the Fed’s blackout period ahead of the April 28–29 FOMC meeting, where officials are widely expected to keep the target range at 3.5% to 3.75% while assessing the economic effects of the conflict.