Federal Reserve officials expected that higher oil prices resulting from the Iran war would increase inflation in the near term and delay price inflation falling back toward their 2% goal, according to minutes from the central bank’s March policy meeting released Wednesday.
Officials noted that a prolonged conflict in the Middle East would likely lead to longer-lasting increases in energy prices, which would in turn raise input costs and be more likely to be passed through to “core” inflation, a measure that excludes volatile energy and food prices.
“The vast majority of participants noted that progress toward the Committee’s 2 percent objective could be slower than previously expected and judged that the risk of inflation running persistently above the Committee’s objective had increased,” the minutes read.
Read more: How oil price shocks ripple through your wallet, from gas to groceries
Most members cautioned that developments in Iran had raised uncertainty for their economic outlook — in particular, increasing the risk of higher inflation and lower employment.
With so much uncertainty, participants emphasized the importance of being nimble in adjusting interest rates. Many 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.”
A couple of officials noted that they had pushed back the timing of rate cuts in light of recent inflation readings.
Most raised concerns that a protracted conflict in the Middle East could further soften the job market, warranting additional rate cuts, as substantially higher oil prices could hurt consumer spending and global growth.
Read more: What experts say about the possibility of additional rate cuts
Many, though, also pointed to the risk that inflation will remain elevated longer than expected amid high oil prices, which could call for interest rate increases to help bring inflation back to the Fed’s 2% goal.
For the second policy meeting in a row, some thought there was a strong case for a two-sided description of future interest rate decisions in the central bank’s policy statement, reflecting the possibility that rate hikes could be appropriate if inflation were to remain above 2%.
Most Fed members saw the job market as balanced and expected low job growth to continue. However, the majority see downside risks given that job creation remains low and that an economic shock could push the unemployment rate higher.
The Fed minutes are released with a three-week lag. Their comments correspond to the time frame of about two-and-a-half weeks into the Iran conflict.
Read More: Officials saw Iran war increasing inflation, delaying rate cuts
