Federal Reserve officials still expect to deliver an interest rate cut this year as they deal with the uncertain economic outlook because of the Iran war, according to minutes from the central bank's March meeting, released on Wednesday.
Although generally backward-looking, Fed minutes provide insights into how members on the Federal Reserve's rate-setting committee regard the economic and monetary policy outlook.
The latest minutes come amid inflation concerns over rising oil prices due to the effective closure of the Strait of Hormuz threaten to derail the central banks' inflation outlooks and rate-setting plans. Financial markets are expecting rate rises from the European Central Bank, while futures markets are also anticipating the Bank of England could raise interest rates.
After holding interest rates steady between of 3.50 to 3.75 per cent last month, Fed leader Jerome Powell told reporters the implications of the Iran war for the US economy were "uncertain". New projections from the Fed also showed they expect to cut interest rates once this year, unchanged from their December projections.
"Many participants judged that, in time, it would likely become appropriate to lower the target range for the federal funds rate if inflation were to decline in line with their expectations," minutes from the Fed's March 17-18 meeting read.
Rate-cut odds improve
A two-week ceasefire announced by US President Donald Trump on Tuesday boosted hopes of a Fed rate cut this year, although traders still anticipate the Fed will remain on hold until 2027. CME Group data showed 22.9 per cent of traders expect the Fed to issue a quarter-point cut in December, up from 13.6 per cent one day ago.
Mr Trump's ceasefire announcement also led to Wall Street's largest one-day surge in a year and oil prices tumbled more than 14 per cent.
The Dow Jones Industrial Average closed 1,325.46 points – or 2.85 per cent – higher amid the decline in oil prices. The S&P 500 and Nasdaq Composite rose 2.51 and 2.80 per cent, respectively.
And even as the Fed still expects to cut interest rates at some point this year, the minutes showed those plans are delayed for now.
"A couple of these participants highlighted that, in their projection for the appropriate path of the policy rate, they had pushed their assessment of the most likely timing of rate cuts further into the future in light of recent readings on inflation," the minutes read.
Rate rise not off the table
The International Monetary Fund has said every 10 per cent sustained increase in oil prices could lead to an increase of 40 basis points in global inflation and lower output by 0.1 to 0.2 per cent. This further complicates the dilemma for the Federal Reserve, which has a dual mandate of price stability and full employment.
Oil prices have been volatile since the start of the war on February, touching as high as $120 a barrel at one point in recent weeks before hovering around $95 a barrel on Wednesday after US President Donald Trump announced a two-week ceasefire.
A sustained increase in oil prices could lead consumers and businesses to reduce spending, which could lead to job cuts.
"Most participants raised the concern that a protracted conflict in the Middle East could lead to a further softening in labour market conditions, which could warrant additional rate cuts, as substantially higher oil prices could reduce households' purchasing power, tighten financial conditions and reduce growth abroad," the minutes read.
They also showed the Federal Reserve has not ruled out the possibility of a rate rise, something that would have been considered unthinkable late last year as the central bank worried over the labour market.
While longer-term inflation expectations remained in line with the Fed's 2 per cent target, "several" officials noted that near-term inflation expectations have risen because of the war's impact on rising energy costs. "Many" participants also suggested a rate increase would be necessary to keep longer-term inflation expectations anchored if a sustained increase in oil prices leads to higher-for-longer inflation.
