The ongoing conflict with Iran and soaring oil prices are reshaping the Federal Reserve's risk assessment. Following a speech in New Haven, Connecticut on Thursday, Fed Governor Lisa Cook stated unequivocally, "The risk of inflation is now greater because of the war with Iran. As for the labor market, I think it's in equilibrium, but that equilibrium is fragile."
This marks the first time a Federal Reserve official has so explicitly stated that the Middle East conflict has shifted the risk balance—inflation concerns have outweighed worries about the job market. Cook also warned that the impact of the conflict could be transmitted through oil prices, having a "substantial effect" on broader prices.
Barr and Miran offered their unanimous support: Observe first, then act.
Cook's two colleagues also spoke on the same day, adopting a similarly cautious tone. Federal Reserve Governor Michael Barr stated at a Brookings Institution event, "It's reasonable to take some time to assess the situation. Our current policy position puts us in a favorable position to remain stable while assessing new data." The implication is that the Fed should remain on hold in the short term.
Federal Reserve Governor Stephen Miran stated at an event in Miami that he still expects the potential inflation rate to move toward the 2% target over the next 12 months, but he also acknowledged the uncertainty brought about by the war and the need for continued monitoring.
Miran on table reduction: It can be reduced by 1-2 trillion, but the pace must be slow.
In his speech, Miran also touched upon another key point of discussion—the scope for reducing the Federal Reserve's balance sheet. He believes that the Fed could potentially reduce its balance sheet by $1 to $2 trillion without triggering financial market turmoil, provided that supporting measures are in place and the process is implemented slowly, on a yearly basis.
"Once this process begins, I recommend a slow pace of reduction to ensure the private sector can absorb all the securities stripped from our balance sheet," Miran said. "I'm excited that all of this could happen, but if it does, or once it does, I expect progress to be slow."
The statements from the three officials clearly convey the Federal Reserve's current collective stance: the inflationary pressures brought about by the war in Iran cannot be ignored, and remaining inactive is the safest option until the situation becomes clearer.
