Analysis: Ceasefire Agreement Makes Fed's Decision Even Trickier

BlockBeats News, April 9th: In a Wall Street Journal article titled "Fed's Whisperer," Nick Timiraos mentioned that the ceasefire between the US and Iran has provided an opportunity to resolve the severe threat to the global economy. However, for the Federal Reserve, this may have simply replaced one problem with another: the continued volatility in energy prices is enough to keep inflation uncomfortably high but not so severe as to crush demand and keep interest rates on hold for longer.

In the minutes of the March meeting, the Fed emphasized that this war was not the main reason deterring rate cuts but rather had made the Fed's already cautious stance even more complicated. Even before the conflict, the path to rate cuts had narrowed. The labor market had stabilized, alleviating concerns about an economic downturn, while progress toward the Fed's 2% inflation goal had stalled.

The Fed did not adjust rates at the March meeting, in part due to concerns about the risks of a prolonged war. Escalation of the conflict could drag down economic growth and pose a risk of recession, which was the last and most compelling reason to support resuming rate cuts.

Paradoxically, in the short term, the end of the war may actually make it harder rather than easier for the Fed to implement an accommodative policy. This is because a ceasefire agreement removes the worst-case economic scenario, where severe price increases disrupt the supply chain and damage demand, which can be said to be more critical than eliminating the risk of new inflation pressures.