Many Fed officials think rate cuts still likely, March meeting minutes show

By Greg Robb

Some monetary-policy makers saw a 'strong case' for a hike - but they were in the minority

Federal Reserve Chair Jerome Powell said last week it is still too soon to know the Iran war's impact on the U.S. economy.

Federal Reserve officials were split over whether the war with Iran would hurt the U.S. labor market or boost inflation, but more were worried about the outlook for jobs, minutes of the Federal Reserve's March policy meeting show.

More of the U.S. monetary-policy makers were in the camp that the next move by the Fed would be to lower interest rates. "Many" officials, according to the minutes, "judged that, in time, it would likely become appropriate to lower the target range for the federal-funds rate if inflation were to decline in line with their expectations."

Only "some" officials judged there was a "strong case" for the Fed to be open to the possibility that the next move could be a rate hike.

"It's encouraging that many Fed leaders still believe an interest-rate cut will happen once the gas-price inflation shock subsides," said Heather Long, chief economist at Navy Federal Credit Union, in a research note.

Prior to the start of the war, the Fed was on a path to slowly lower rates as inflation moved back to its target. The spike in gasoline prices since the start of the conflict has threatened to upset that plan.

See: Inflation isn't going to slow anytime soon, even if the Iran cease-fire holds. Here's why.

At their meeting held March 17-18, Fed officials kept rates steady in a range of 3.5% to 3.75% for a second straight meeting. Fed Chair Jerome Powell chose not to say too much about how the energy shock would affect the economy, adopting a "wait and see" stance.

Fed officials stuck to a forecast of one rate cut this year, but economists think the central bank is in no rush to do anything with rates.

In their discussion on the impact of the war, "most" Fed officials said that a protracted conflict would soften labor-market conditions, "which could warrant additional rate cuts." That's because higher oil prices (CL00) could reduce household spending power.

A smaller number of Fed officials made the case that the war raised the risk that inflation would remain elevated for longer than otherwise expected. That could call for rate increases to help bring inflation down.

Officials concluded that it was "too early to know" how the conflict would affect the economy, and said it was important to remain "nimble."

The Fed's staff forecast built in a "small effect" on economic activity from lower equity prices and higher crude-oil prices due to the war. The staff slightly lowered its estimate for growth and said the unemployment rate would remain near its current level for most of the next year. In January, the Fed staff projected the unemployment rate would move lower.

In the three weeks since the Fed meeting, officials are still not sure about the outlook.

"It's an unusual time for the economy. There are substantial risks, and uncertainty is high," said New York Fed President John Williams.

Mark Hulbert: Interest rates are headed lower - real yields suggest a half-point Fed cut is coming

So far, the fallout from the Middle East conflict has been smaller than anticipated, said Stephen Stanley, chief U.S. economist at Santander, in a note to clients.

Worries about the labor market eased somewhat after the government reported the U.S. economy added a solid 178,000 jobs in March.

"Despite all the worries ... the economy is actually performing quite well," said Matthew Luzzetti, chief U.S. economist at Deutsche Bank, in an interview with Bloomberg. "If you take a step back, all of the aggregate spending data still looks quite good," he added, with consumer spending and business investment remaining solid.

The U.S. and Iran entered into a two-week cease-fire late Tuesday, just before President Donald Trump's unilateral deadline for a reopening of the Strait of Hormuz arrived.

Don't miss: Iran moves to put the brakes on reopening the Strait of Hormuz

-Greg Robb

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04-08-26 1609ET