The Federal Reserve discussed the possibility of raising interest rates at its meeting last month amid surging oil prices triggered by the war between the U.S.-Israel coalition and Iran, according to minutes released Wednesday. While the Fed sees no urgency to raise rates unless the war drags on for months, it views energy prices as the key variable for inflation trends in the near term.
The Fed released minutes from its March 17-18 Federal Open Market Committee (FOMC) meeting on Tuesday (local time), revealing that "some participants judged that there was a strong case for including 'two-way scenarios' in the statement." This indicated that some FOMC participants argued the Fed should signal both rate cut and rate hike possibilities for future policy decisions. According to the minutes, these participants suggested that "it could be appropriate to raise the target range for the federal funds rate if inflation continues to run above the Fed's 2% target."
However, more participants believed it would be appropriate to lower rates over time if inflation falls as expected. Among them, a few said they had pushed back their expected timing for rate cuts to reflect recent inflation data.
Fed Chair Jerome Powell had previously mentioned the rate hike discussion at the press conference following last month's FOMC meeting. At the time, Powell said, "We did discuss a rate increase at this meeting, but most participants did not see it as a base case scenario," adding that "the Fed does not completely rule out any option."
The catalyst for the Fed to revisit rate hike discussions after cutting rates three consecutive times from September to December last year was the Middle East war that began on February 28. According to the minutes, FOMC participants identified rising energy prices as a key variable for future inflation trends after oil prices surged above $100 per barrel due to the war. Most participants projected that the process of bringing inflation down to 2% could take longer than expected. They also assessed that the risk of inflation rising further had increased. The minutes noted that all participants agreed monetary policy does not follow a predetermined path and should be determined based on data available at each meeting.
Participants noted that the labor market is generally in balance but could be vulnerable to external shocks such as the Middle East situation. This is because a prolonged war could dampen business sentiment and lead to reduced hiring.
Regarding the Iran war, Chair Powell maintained a cautious stance during a lecture at Harvard University in Massachusetts on March 30, saying, "We may face the question of what we should do, but not yet." Powell emphasized, "Our policy is well positioned to wait and see how the situation unfolds," adding that "the effects of energy supply disruptions are usually short-term, but monetary policy works too slowly to offset them in real time." New York Fed President John Williams said in a Bloomberg TV interview on April 7 that "the situation hasn't changed much" due to the Iran war, projecting that "core inflation, excluding food and energy, will only rise by an additional 0.1 to 0.2 percentage points."
Meanwhile, the Fed held the benchmark interest rate at 3.50-3.75% at last month's FOMC meeting. Of the 12 voting members, 11 agreed to hold rates steady, with only Governor Steven Myron, a pro-White House appointee, dissenting in favor of a 0.25 percentage point cut. In its post-meeting statement, the Fed said "the impact of the Middle East situation on the U.S. economy remains uncertain." According to the CME FedWatch tool on Tuesday, the federal funds futures market priced in a 98.4% probability that the Fed will hold rates at its April 28-29 FOMC meeting. The market sees a 74.0% chance that the Fed will maintain current rates through the final FOMC meeting in December.