Federal Reserve's Waller: The Iran conflict is insufficient to trigger sustained inflation, favors maintaining a 25 basis point rate cut.

Federal Reserve Governor Christopher Waller stated that the Iran war will not have a lasting impact on inflation, and reiterated his policy preference for a 25-basis-point rate cut. This statement offers new signals for monetary policy direction at a time when the market is uncertain about the Fed’s next move.

In a Bloomberg TV interview on Friday, Waller pointed out that while rising oil prices may make consumers feel price shocks, policymakers will not adjust their policy stance due to a one-off energy price fluctuation. He emphasized that core inflation, which excludes energy and food prices, is a more reliable indicator for predicting future inflation trends.

Previously, Waller voted against the majority at the Fed’s January meeting, advocating for a 25-basis-point rate cut due to continued signs of weakness in the labor market. However, subsequent nonfarm payroll data for January far exceeded expectations, cooling market expectations for a Fed rate cut in the near term.

Interest rate swap data shows that traders currently price in about a 35-basis-point rate cut for the year, a sharp drop from around 60 basis points at the end of last week.

Energy Price Shock Does Not Change Policy Direction

Waller made it clear that the oil price rise caused by the Iran conflict is a one-off disturbance and is not enough to shake the Fed’s policy judgment. "From a policy outlook perspective, it is unlikely to cause sustained inflation," he said.

This logic is consistent with the Fed’s long-term policy framework. Energy and food prices are highly volatile and hard to reflect inflation’s underlying trend, so core inflation remains the main reference point for interest rate decisions.

March Meeting Expected to Hold Steady

Based on current market expectations, Fed officials are expected to leave benchmark interest rates unchanged for a second consecutive time at the March 17-18 meeting. Several officials have previously signaled that, with the labor market stabilizing and inflation still above the 2% target, policymakers have sufficient room to remain on hold.

At the end of 2025, the Fed had cut rates three times in a row, partly in response to weak labor market signals at the time. With improving employment data, the urgency for further easing has clearly diminished.

Employment Data Becomes Key Variable

Waller's dissenting vote at the January meeting reflected his ongoing focus on the health of the labor market. However, the strong performance of January’s nonfarm payroll data has somewhat weakened support for his stance.

The February nonfarm payroll report will be released at 8:30 a.m. Friday (Washington time), and will be an important reference for the market in assessing the Fed’s subsequent path. The direction of the data could further affect traders’ pricing expectations for the pace of rate cuts this year.

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