'Dovish' Fed's Waller Cautious on Rate Cuts... Inflation Concerns from Iran War

Christopher Waller, Governor of the U.S. Federal Reserve (Fed)

Christopher Waller, a governor of the U.S. Federal Reserve (Fed) who is considered a 'dove' (prefers monetary easing), expressed caution regarding short-term interest rate cuts, stating that rising energy prices due to the war in Iran could fuel inflation.

According to Bloomberg News on the 17th (local time), Governor Waller made these remarks in a speech at Auburn University in Alabama, presenting two monetary policy paths depending on the development of the Iran war.

He first explained that if the Strait of Hormuz reopens and trade flows normalize, the rise in energy prices could be considered a temporary factor, and interest rate cuts to support the labor market could be considered in the second half of this year.

Governor Waller anticipated that core inflation would gradually decline towards the Fed's target of 2% in this scenario, stating that while caution is warranted for immediate rate cuts, he would lean towards cuts to support the labor market when the economic outlook becomes more stable in the second half of the year.

Conversely, he pointed out that if the war prolongs and energy prices remain high, inflationary pressures could expand as businesses pass on cost burdens to consumer prices.

Governor Waller stated that if these upward price pressures coincide with a weak labor market, the scope for policy response could be limited.

He stated that considering the risks of inflation and employment comprehensively, if inflation risks outweigh employment-related risks, there is a possibility that the policy rate will be maintained at its current level.

Regarding employment, Governor Waller diagnosed that the standards of the labor market are changing due to a sharp decline in immigration, leading to a reduction in labor force inflow.

He said, "There is almost no need for new job creation to absorb new labor, which is unprecedented in recent history and an important factor in understanding the economic outlook and monetary policy."