Federal Reserve voting member: The shadow of war hangs over the economic outlook, and the Fed can stand pat.

According to Wall Street Journal’s renowned reporter Nick Timiraos, often referred to as the “new Fed communications chief,” Minneapolis Fed President Neel Kashkari said that if inflation cools, one or two rate cuts later this year may be appropriate. However, the Middle East war could create a situation warranting a prolonged pause in action.

Kashkari reiterated in a Monday interview with the Wall Street Journal that he believes the current 3.5%-3.75% interest rate range is close to a “neutral level,” neither stimulating nor restraining the economy. He stated that before the latest outbreak of war, inflation was gradually receding, so the economy did not need to maintain a restrictive rate policy. Prior to the Iran incident, things seemed to be moving gently in the right direction. Meanwhile, the labor market was steady but slightly soft and was not a source of inflationary pressure.

Kashkari noted that the war could complicate the situation, but it is too early to judge its impact. He compared the current scenario to the Russia-Ukraine conflict of 2022. That conflict triggered a global commodity shock and demonstrated that such shocks can be more lasting than expected:

Back then, I was on the transitory side. It truly was transitory, just more severe and lasting longer than we anticipated. Do we really want to try another Transitory 2.0?

Timiraos pointed out in the article that after three Fed rate cuts last year, the Fed held steady at its January meeting. The public generally expects the Fed to maintain this stance at the March 17-18 meeting. The stabilization of the labor market and the desire to see further progress on inflation already made the probability of a cut before summer low. The Iran war adds another reason to wait.

Kashkari has a voting right in the Federal Open Market Committee (FOMC) this year. He said the surge in oil prices could bring conflicting pressures: rising energy costs may exacerbate inflation and support tighter policy; but if it impacts confidence and spending, it could support a more dovish policy. Without being able to measure which effect will weigh heavier, there may be more reason to hold steady for now.

Kashkari also noted that in last December’s quarterly economic forecast, he expected one rate cut this year. He thinks it is reasonable for the Fed to retain a so-called “dovish tilt”—that is, to hint in overall communication that the next move is more likely a cut than a hike. “I have no problem with this, but the Iran situation and its effect on oil and other commodity prices might somewhat upset this perspective.”

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