As a surge in oil prices driven by the Middle East conflict showed signs of unsettling the U.S. disinflation trend, the Federal Reserve, the U.S. Central Bank, discussed the possibility of a "two-way response" on the path of the policy rate. It sent a signal that it could cut rates as expected but also raise them again if needed.
According to the minutes of the March Federal Open Market Committee (FOMC) meeting (Mar. 17–18), released on Apr. 8, Commissioners at the Fed said there had been "no further progress" in slowing inflation in recent months. They singled out energy price increases stemming from the Middle East situation as a key variable for the inflation outlook.
Many Commissioners judged that the path of returning inflation to the 2% target could be slower than expected, increasing the upside risks to inflation. There is concern that if higher oil prices persist, the disinflation path itself could be shaken.
There were also signs of a potential shift in the policy stance. While many Commissioners maintained their view that a rate cut would be appropriate over the longer term if inflation slows as expected, some said they had pushed back the timing of rate cuts in light of recent inflation data. Furthermore, some Commissioners openly raised the possibility of rate hikes, saying "it may be appropriate to raise the target range for the federal funds rate if inflation persists above the target level."
Accordingly, some participants argued there was a strong case to include a "two-sided description" in future monetary policy statements that reflects both the possibility of rate cuts and rate increases.
It is unusual for the possibility of rate hikes to be discussed this explicitly within the Fed. While such references were limited at the January meeting, analysis suggests that vigilance has increased as concerns about a resurgence of inflation have grown following the outbreak of war in the Middle East.
The labor market was generally assessed as being in balance, but vulnerabilities to external shocks were also noted. In particular, there were concerns that a prolonged Middle East conflict could dampen corporate sentiment and lead to reduced hiring.
Reuters said, "The minutes show the Middle East conflict is pushing the Fed between opposing policy directions and threatening its dual mandate of price stability and maximum employment at the same time."
Earlier, the Fed kept the policy rate unchanged at 3.50–3.75% at the March meeting. At the time, Commissioner Steven Myron advocated a 0.25 percentage point rate cut as the sole dissent.