FOMC Minutes Signal Fed Saw "Dual Sided" Risks From Iran War

Since the last FOMC meeting (March 18th), a lot has happened (war, more war, and now less war), and rate-change expectations hawkishly surged, then dovishly normalized today...

And given the last 24 hours, perhaps this information is more useful now, as we return to macro-fundamentals from geopolitical chaos running markets.

The minutes, released three weeks after the meeting, underscore the Fed's dilemma as it seeks to fill its congressional mandates of low inflation and maximum employment.

Fed officials wrestled with starkly differing scenarios for the US economy following the outbreak of the Iran war, including one that called for interest-rate cuts and another that would require raising rates.

On one side, Fed officials acknowledged that the Iran conflict could also force households to cut back spending to offset higher gas prices, which would slow growth and raise unemployment.

"...most participants raised the concern that a protracted conflict in the Middle East could lead to a further softening in labor market conditions, which could warrant additional rate cuts," according to the minutes of the meeting.

But on the other side:

"...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."

And at the same time, many policymakers highlighted the risk to inflation that might ultimately warrant rate increases.

"Partly as a result of these factors, the vast majority of participants noted that progress toward the Committee's 2 percent objective could be slower than previously expected," according to the minutes.

The record of the meeting also showed that a growing number of officials urged their colleagues to consider language in the committee’s statement raising the scenario of hiking interest rates under certain conditions.

“Some participants judged that there was a strong case for a two-sided description of the committee’s future interest-rate decisions in the post-meeting statement, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation were to remain at above-target levels,” the minutes said.

As a reminder, The Fed kept its key rate unchanged at about 3.6% with Powell saying that another reduction depended on underlying inflation cooling steadily this year:

"If we don’t see that progress then you won’t see the rate cut,” he said then.

Will the ceasefire slow inflation or is the damage already done and yet to flow through global supply chains?

Read the full Minutes below: