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

Former Federal Reserve Chair and former U.S. Treasury Secretary Janet Yellen recently stated that the impact of the Iran conflict on the oil market will determine how long the U.S. economic growth will be affected, while inflationary pressures will also increase, complicating the Federal Reserve's decision-making:

I believe the recent situation in Iran has made the Federal Reserve more hesitant to act, more unwilling to cut interest rates than before the events occurred.

Currently, the inflation rate is still about 1 percentage point higher than the Federal Reserve's 2% target. President Trump's tariff policy has contributed about 0.5 percentage points to the current inflation level of around 3%.

Now with the Iran shock, oil prices have already risen significantly—what will happen in the coming days is still unclear. If the Strait of Hormuz is closed for more than a few days—this strait handles a large amount of oil transport in the region, oil prices may remain high or even rise further.

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

Given that the Federal Reserve has not yet brought the inflation rate back to 2%, Yellen stated: “They must be concerned that market participants start to think: yes, they have brought inflation down to 3%, but they are not really serious about bringing it down to 2%. If this psychological expectation forms, the market will worry about inflation remaining at a higher level for a long time, leading to worse policy trade-offs, which is also why the Federal Reserve may be more hesitant to act.”

Despite significant risks, including the Iran conflict, Yellen stated: “Overall, the U.S. economy is currently quite healthy, and I am fairly optimistic about the economic outlook.”

Yellen also criticized some of the Trump administration's actions against the Federal Reserve. She stated that the president's attempt to remove Governor Lisa Cook is almost unimaginable. The Supreme Court has not yet commented on this, but Trump is likely to lose.

Yellen mentioned that the president “has taken unprecedented steps to effectively weaponize the Department of Justice against the Federal Reserve Chair.” This refers to the investigation by the U.S. Department of Justice into Federal Reserve Chair Jerome Powell's comments last year regarding the cost overruns of the Fed building renovation. Yellen stated that if criminal charges are brought, it would pose a significant threat to the independence of the Federal Reserve. “I believe everyone recognizes that this would severely impact economic policy and could significantly elevate inflation.”

Yellen also pointed out that many of President Trump's disruptive policies affecting the global economy are reflected in investors demanding a higher risk premium on U.S. Treasury bonds. She stated that increasing concerns about U.S. economic policy are also putting downward pressure on the dollar, as the market believes that higher risks need to be compensated