The escalating Iran war is reshaping the Federal Reserve's risk calculus as oil prices surge. Fed Governor Lisa Cook said Thursday in New Haven, Connecticut: “Because of the Iran war, inflation risks are now larger. The labor market is balanced, but the balance is fragile.” It's the first time a Fed official explicitly stated that Middle East conflict has tilted the risk balance—inflation anxiety now outweighs job market worries. Cook warned the war's impact could transmit through oil prices and have a “material effect” on broader prices.
Barr and Miran Echo: Wait and See
Two other governors also spoke on the same day. Fed Governor Michael Barr told the Brookings Institution: “It's reasonable to take some time to assess the situation. Our current policy stance puts us in a good position to stay steady while evaluating new data.” The message: no rate move in the near term.
Governor Stephen Miran said he still expects underlying inflation to converge toward the 2% target over the next 12 months, but acknowledged the war brings uncertainty that requires monitoring.
Miran on Balance Sheet: Could Shrink $1-2 Trillion, but Slowly
Miran also addressed the Fed's balance sheet reduction. He sees potential to shrink it by $1-2 trillion without disrupting financial markets, provided safeguards are in place and the process is gradual over years. “Once the process begins, I recommend a slow pace to ensure the private sector can absorb all securities shed from our balance sheet. I am excited about achieving this, but I expect progress to be slow,” he said.
The collective message from the three officials is clear: the inflation threat from the Iran war cannot be ignored, and the safest choice before clarity emerges is to hold steady.
Related coverage: Bloomberg reported traders are betting on an emergency rate hike in weeks; OECD warned US inflation could spike to 4.2% and Europe might be forced to raise rates; Trump claimed Iran's navy and air force have been “fully destroyed” and the conflict's impact on markets is less severe than feared.