Fed Should be 'Nimble' Amid War-Driven Macro Risks, March Meeting Minutes Show
The Federal Reserve should be "nimble" in adjusting monetary policy in light of heightened risks to inflation and employment driven by the Middle East conflict, minutes from the central bank's March 17-18 meeting showed Wednesday.At the meeting, the Federal Open Market Committee decided to keep its policy rate unchanged between 3.50% and 3.75% for a second straight time amid uncertainty around the US-Israel war with Iran. The FOMC's Summary of Economic Projections at the time continued to indicate potential policy easing this year."In light of the heightened degree of economic uncertainty, participants emphasized the importance of being nimble in adjusting the stance of policy in response to incoming data, the evolving outlook, and the balance of risks," the meeting minutes showed Wednesday. "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."A couple of policymakers pushed their expected timing of potential policy easing "further into the future," according to the document."The vast majority of participants judged that upside risks to inflation and downside risks to employment were elevated, and the majority of participants noted that these risks had increased with developments in the Middle East," the minutes showed.On Tuesday, the US and Iran agreed to a two-week ceasefire. The war, which began at the end of February, spread across the Middle East and curtailed shipments through the crucial Strait of Hormuz, driving up energy prices.West Texas Intermediate crude oil sank nearly 15% to $96.34 a barrel intraday, while Brent futures tumbled 12% to $96.55. Despite the declines, oil prices remained well above pre-war levels."Our baseline view is that as the (energy price) shock gradually fades, so too will inflation pressures," TD Economics Senior Economist Andrew Hencic said in a note Wednesday. "This may open the door for the Fed to normalize rates in the latter half of the year."Most policymakers were concerned that a prolonged war could soften labor market conditions, possibly warranting additional policy easing, the meeting minutes showed Wednesday.Earlier this month, official data showed that the economy added more jobs than expected in March, while the unemployment rate edged down to 4.3% from 4.4% sequentially."Many participants pointed to the risk of inflation remaining elevated for longer than expected amid a persistent increase in oil prices, which could call for rate increases to help bring inflation down to the committee's 2% objective and keep longer-term inflation expectations firmly anchored," according to the latest meeting minutes. "Participants anticipated that, under appropriate monetary policy, inflation would gradually move down toward the committee's 2% objective after the effect of increased tariffs and higher oil prices had faded."Markets widely expect the FOMC to keep interest rates unchanged later this month, according to the CME FedWatch tool.