By Matt Grossman
One of the Federal Reserve's most outspoken supporters of recent interest-rate cuts said Friday that a prolonged conflict in the Middle East could remove the central bank's scope for bringing rates lower this year.
In a speech at Alabama's Auburn University, Fed governor Christopher Waller said that if the Iran war means an ongoing blockage of the strategically vital Strait of Hormuz, higher prices could ripple through the American economy and force the Fed to stay on guard against inflation. In that scenario, the Fed may have to hold interest rates steady even if the labor market is weakening, Waller said.
"That may mean maintaining the policy rate at the current target range if the risks to inflation outweigh those to the labor market," Waller said, according to a published text of his remarks.
If oil and other commodities begin flowing out of the region again soon, the Fed may have more room to opt for further rate cuts later this year. But even in that scenario, Waller said he would be "cautious about rate cuts" for the time being.
Waller's comments illustrated a shift in his thinking from earlier this year on the risks facing the economy. At the Fed's January meeting, he dissented against the central bank's decision to hold rates steady, arguing that a labor-market slowdown warranted giving the economy more support in the form of a rate cut. Last month, however, he voted alongside the near-unanimous majority of Fed officials who backed holding rates steady for a second straight meeting.
Several developments have shifted the outlook, Waller said. He noted that the Iran war is just the latest economic shock that could push up prices, landing while the economy is still navigating the fallout of President Trump's tariff agenda. If left unchecked, even a series of one-off supply pressures like those could produce a challenging bout of inflation, Waller said.
"While intellectually it makes sense to look through each shock, with a sequence of shocks, policymakers need to be more vigilant. This is because if the shocks hit one after another, they will keep inflation elevated for quite some time," he said.
Meanwhile, the immigration crackdown has reduced growth in the number of people available to work in the U.S. more than was previously understood, Waller said. That means months of sluggish net job growth, or even modest job losses, might not signal a serious downturn that warrants a Fed response.
"I am going to have to get used to payroll numbers that are lower than I am accustomed to seeing in a growing economy as well as the possibility that even several months of negative payrolls may not be the warning sign of a recession that it often has been in the past," he said.
Waller spoke amid a confusing back-and-forth between U.S. and Iranian officials Friday that left the current status of the Strait of Hormuz difficult to parse. Iran declared the strait open for shipping even as President Trump insisted that the U.S. will maintain its naval blockade for the time being. One maritime-security company told clients that they should wait for more clarity before navigating the route.
Waller's comments come hours before the traditional communications blackout that precedes Fed meetings, in the runup to the next policy decision on April 29. Traders are forecasting a continued policy pause and have extended bets that the Fed will hold rates steady well into the future as the Middle East conflict raises inflation risks.
Write to Matt Grossman at matt.grossman@wsj.com
(END) Dow Jones Newswires
04-17-26 1415ET
