WASHINGTON, March 4 (Reuters) – Inflation and other risks from the U.S. military conflict with Iran haven’t changed the need for the U.S. Federal Reserve to keep cutting interest rates this year, with price pressures expected to ease and the job market still at risk, Fed Governor Stephen Miran said on Bloomberg TV on Wednesday.
Higher oil prices due to the conflict “will feed into headline inflation, but the evidence that it feeds into core inflation … is quite limited. … It is difficult for me to get very excited about a policy implication of what’s happened so far,” Miran said, adding that the Fed in his view should make four quarter-point rate cuts this year to reach a roughly neutral level, a point some of his more hawkish colleagues believe has been reached already with the policy rate in a 3.5%-3.75% range.
Unlike 2022, when Russia’s invasion of Ukraine led to a global jump in oil and other commodity prices and helped stoke broader price pressures, Miran said the current situation was different because monetary policy was tight and fiscal policy less expansionary, lowering the risk of persistent inflation.
Meanwhile he said the Fed should not ignore the “two plus years of a trend of gradually weakening labor markets. … There is still evidence to me that it needs support from monetary policy,” including things like the difficulty recent college graduates have had finding a job, Miran said.
The weekend launch of massive U.S. and Israeli attacks on Iran have added new elements of risk to a Fed policy debate that was already divided. Inflation is currently about 1 percentage point above the Fed’s 2% target and has made little progress for a year. Job growth has slowed to a crawl, though policymakers disagree over whether that is a sign of weak demand for labor or, with the unemployment relatively low and stable in recent months, shows the economy adapting to tight immigration rules that have limited the supply of available workers.
STRONGER-THAN-EXPECTED JOBS GROWTH
But January job growth was stronger than expected, with officials looking ahead now to February jobs data to help confirm whether employment trends may be turning a corner. An employment report from private payroll processor ADP posted the largest gains in 7 months, beating expectations.
In the meantime, with the Iran conflict still in what may be early days and U.S. officials pledging it will continue until the country’s hardline Islamist regime is replaced, Fed officials have been hesitant to do anything more than note the new uncertainties around the outlook.
Cleveland Fed President Beth Hammack said in a New York Times interview that she was watching the economic fallout from the conflict, but had already been adamant that the Fed should keep rates on hold because inflation appeared stuck at a high level. Unlike Miran, who sees the neutral rate as much lower than his colleagues, Hammack feels the Fed is already at or near a neutral level.
“We’re in a good spot from a policy perspective,” and able to respond as new data show how the job market and prices are evolving, Hammack said. “I think we could be on hold for quite some time.”
The Fed meets on March 17-18 and is expected to hold rates steady. While investors still expect the Fed to cut rates twice this year, the timing slipped back after the Iran conflict began, with an initial reduction anticipated at the central bank’s July meeting rather than in June.
(Reporting by Howard Schneider; Editing by Mark Porter)
