US Fed Waller cautious on interest rate cut... Iran war-induced inflation concerns

US Fed Waller cautious on interest rate cut... Iran war-induced inflation concerns

"Reviewing cuts in H2 if Hormuz reopens... Current level possible if prolonged"

Christopher Waller, a governor of the US Federal Reserve (Fed) regarded as a 'dove' (preferring monetary easing), expressed caution regarding short-term interest rate cuts, stating that rising energy prices due to the war in Iran could stimulate inflation.

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

In this scenario, Governor Waller expects core inflation to gradually decline towards the Fed's target of 2%, stating that while he is cautious about rate cuts for now, he would lean towards cuts to support the labor market when the economic outlook in the second half is more stable.

Conversely, he pointed out that if the war is prolonged and energy prices remain high, inflation pressures could expand as companies pass on cost burdens to consumer prices.

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

He stated that considering the risks to prices and employment comprehensively, there is a possibility that the policy rate could be maintained at its current level if price risks outweigh employment-related risks.

Regarding employment, Governor Waller diagnosed that the labor market's benchmarks are changing as the influx of labor decreases due to a sharp drop in immigration.

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