Former Fed Chair and former U.S. Treasury Secretary Yellen: The situation in Iran makes the Fed even less willing to cut interest rates

Former Federal Reserve Chair and former U.S. Treasury Secretary Yellen recently stated that, depending on how long the Iran conflict impacts the oil market, U.S. economic growth will be hit, and inflationary pressures will intensify, making the Fed’s decision-making even more complicated:

I believe the recent situation in Iran makes the Federal Reserve more cautious, and even less willing to cut interest rates than before the incident.

Currently, the inflation rate is still about one percentage point above the Fed's 2% target. President Trump's tariff policy has contributed about 0.5 percentage points to the current approximately 3% inflation level.

Now there is an Iran shock, oil prices have already risen sharply—we don't know what will happen in the next few days. If the Strait of Hormuz is closed for more than a few days—which carries much of the region’s oil transportation—oil prices may stay high or climb even further.

Before the Iran shock, the Federal Reserve believed it had already addressed the weakness in the U.S. labor market and was waiting for inflation to fall back.

Since the Fed has not yet pulled the inflation rate back to 2%, Yellen said: “They must worry that market participants will start thinking: Yes, they got inflation down to 3%, but they aren’t really serious about bringing it down to 2%. If this mindset takes hold, the market will be concerned that inflation will remain at a higher level for a long time, leading to worse policy tradeoffs, which is also a reason the Fed may be even more cautious.”

Despite major risks, including the Iran conflict, Yellen said: "Overall, the U.S. economy is currently quite healthy, and I am quite optimistic about the economic outlook."

Yellen also criticized several actions by the Trump administration against the Fed. She said it’s almost unimaginable that the president attempted to remove Governor Lisa Cook. The Supreme Court has not yet commented, but Trump is likely to lose the case.

Yellen mentioned that the president “has taken unprecedented steps, essentially weaponizing the Department of Justice to target the Fed Chair.” This refers to the DOJ investigation of Fed Chair Powell last year regarding statements about cost overruns on renovations to the Federal Reserve building. Yellen said if criminal charges are filed, it would pose a huge threat to the Fed’s independence. “I believe everyone realizes this would deliver a severe blow to economic policy and could push inflation much higher.”

Yellen also pointed out that many of President Trump’s disruptive global economic policy actions are reflected in investors demanding a higher U.S. Treasury risk premium. She stated that heightened concerns about U.S. economic policy also put downward pressure on the dollar, as the market believes greater risk needs compensation.

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