Former U.S. Treasury Secretary Yellen: Middle East conflict risk makes the Federal Reserve more inclined to hold steady

Former U.S. Treasury Secretary and former Federal Reserve Chair Janet Yellen said Monday that the duration of the impact of the Iran conflict on the oil market will determine how much it will hurt U.S. economic growth and how much inflation pressure it will bring, making Fed decisions more complicated.

At a video conference in Long Beach, California, Yellen stated, “I believe the recent Iran situation makes the Federal Reserve more inclined to hold steady, and compared to before the events, they will be more cautious about cutting rates.”

Yellen pointed out that the current U.S. inflation rate remains about one percentage point above the Fed’s 2% target. She said that the tariffs implemented by Trump contributed roughly half a percentage point to the current 3% inflation.

Before the escalation of the Iran situation, the Fed had largely believed that the labor market’s softness had been somewhat alleviated, and policymakers were waiting for inflation to further decline.

“But now with the Iran shock, oil prices have surged—how the situation develops in the coming days is uncertain,” Yellen said. If the closure of the Strait of Hormuz lasts more than a few days, oil prices could stay high or rise further.

On Monday, international crude oil futures prices surged over 6%. WTI April futures rose 6.28% to $71.23 per barrel; Brent April futures rose 6.68% to $77.74 per barrel.

The rise in oil prices adds new variables to a series of recent indicators. Historically, soaring energy costs often signal broader inflation increases.

Yellen emphasized that until inflation falls back to 2%, the Fed must be alert to a market perception: “They might start to think that inflation has indeed fallen from high levels to 3%, but the Fed doesn’t seem truly committed to bringing inflation back to 2%.”

She said that if such expectations form, markets will worry that inflation will remain higher for a longer period, complicating policy trade-offs. Therefore, the Fed may be more inclined to keep interest rates unchanged.

Despite severe risks including the Iran conflict, Yellen summarized, “Overall, I think the U.S. economy is quite healthy, and I am relatively optimistic about the economic outlook.”

Additionally, aside from energy markets, there are signs that inflation pressures may be becoming entrenched. The U.S. core Producer Price Index (PPI) for January rose 0.8% month-over-month, exceeding expectations.

Most economists say that the impact of rising oil prices is hard to gauge and may ultimately prove to be temporary—similar to past Middle East conflicts.

“Given that the conflict is still in its early stages, it’s unclear whether the price increases will be sustainable in the medium term,” said Ravikanth Rai, Vice President of Energy and Natural Resources at Morningstar. “It’s difficult to determine whether the region’s oil and gas supply will be affected structurally.”

Meanwhile, markets have increased bets that the Federal Reserve will keep rates steady at the March meeting and possibly extend this stance into summer, as officials weigh conflicting factors such as rising energy prices and uneven economic growth.

(Source: Caixin Global)