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On April 17, Federal Reserve Governor Christopher Waller warned that the conflict with Iran has put the U.S. economy at risk of facing a price shock with persistence similar to the Covid-19 era.
Speaking in Alabama, Waller said higher oil prices, alongside tariffs under President Donald Trump, are increasing the likelihood of a sustained period of inflationary pressure in the world’s largest economy.
“I believe there is a possibility that this sequence of price shocks could lead to a persistent rise in inflation, similar to what we saw with the shocks during the pandemic,” Mr. Waller said.
Waller’s remarks reflected concerns among U.S. monetary policymakers that the Iran conflict could weaken public confidence in the Fed’s ability to control inflation.
He pointed to the inflation backdrop: in 2022, the Personal Consumption Expenditures (PCE) price index rose to the highest level in decades, surpassing 7% after the pandemic disrupted supply chains and government stimulus boosted demand. Since then, inflation has remained above the Fed’s 2% target.
Waller said the oil price rally is likely to push annual inflation higher in coming months from 2.8% in February. He cited the Consumer Price Index (CPI), noting that March data rose from 2.4% to 3.3%, driven mainly by higher fuel prices.
Oil prices surged on April 17 after the U.S. and Iran announced that the Hormuz Strait would remain open during talks to halt hostilities. The ceasefire is expected to expire by the evening of April 21.
Waller said a prolonged conflict could produce a “very complex” inflation scenario in which high inflation coincides with a weak labor market.
In that case, he suggested the Fed could be constrained in its ability to support the economy through interest-rate cuts. Rates are currently in a range of 3.5% to 3.75%.
He also noted that markets have largely priced out the possibility of rate cuts this year. Last year, the Fed implemented three cuts of 0.25 percentage point each.
While Waller voted in January to support rate cuts to help borrowers, the majority of committee members chose to keep rates unchanged.
Waller said that if the conflict is resolved early and Hormuz reopens, the impact on U.S. inflation could be temporary.
However, he warned that if energy prices remain high for longer, the risk increases that inflation could become sustained and bleed into the U.S. economy, leading households and businesses to price in stronger inflation expectations for an extended period.
“I will be especially watching for signs that this latest price shock, together with tariff effects, has raised inflation expectations,” Mr. Waller said.
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