A top Fed official says the Iran war and inflation risks could keep interest rate cuts on hold

Federal Reserve Governor Christopher Waller said Friday that a continuing conflict with Iran — layered on top of existing inflation pressure from import tariffs — could force the central bank to hold its benchmark interest rate steady even if the labor market deteriorates.

"High inflation and a weak labor market would be very complicated for a policymaker," Waller said in a speech at Auburn University in Alabama. "That may mean maintaining the policy rate at the current target range if the risks to inflation outweigh those to the labor market."

The Fed's benchmark federal funds rate currently sits at a range of 3.5% to 3.75%, where it has been held since the Federal Open Market Committee's March 17–18 meeting.

Waller framed his outlook around two scenarios. If progress is made to reopen the Strait of Hormuz and energy markets return to something close to pre-conflict conditions, he said he would look past the recent energy-driven inflation spike and focus on the labor market, remaining cautious about rate cuts now but open to them later in 2026. In the second scenario — one he described as a "very possible" outcome — the Strait remains closed, energy prices stay elevated, and inflation becomes more broadly embedded across goods and services, making the case for cuts much harder to sustain.

Waller flagged the risk that back-to-back inflationary episodes — tariff-driven first, then energy-driven — could prove harder to contain than either would be in isolation, drawing a parallel to the pandemic era, when repeated supply disruptions compounded into the worst inflation in four decades. "While intellectually it makes sense to look through each shock, with a sequence of shocks, policymakers need to be more vigilant," he said.

On inflation, Waller said that stripping out tariff effects, underlying inflation had been running close to the Fed's 2% goal through the end of February. That changed in March, when the energy component of the consumer price index jumped 10.8% in a single month. He said estimates suggest March personal consumption expenditures inflation will come in at about 3.5% for the headline measure and 3.2% for core.

Gasoline prices have climbed more than one-third since the conflict began, reaching a national average of $4.10 per gallon as of the date of the speech. Brent crude, which started the year at $61 a barrel, has been trading at about $95 a barrel in recent days.

The labor market also drew attention in Waller's remarks. He said businesses appear caught between the difficulty of finding workers in recent years and their anxiety about the economic outlook, a tension he warned could snap quickly — and result in mass layoffs — if conditions take a turn for the worse. He noted that the breakeven rate of job creation needed to hold the unemployment rate steady has likely fallen to close to zero, given a sharp decline in net immigration and continued aging of the population.

The Fed held rates steady at its March meeting, citing conflicting pressures from elevated inflation and an uncertain labor market. At that meeting, the FOMC voted 11–1 to maintain its current rate target, with Fed Governor Stephen Miran dissenting in favor of a cut. New York Fed President John Williams separately warned that the conflict poses the risk of a large supply shock that could simultaneously raise inflation and slow economic activity. The FOMC's next meeting is scheduled for April 28–29.

Longer-term inflation expectations have so far remained anchored, Waller said, with inflation-adjusted Treasury securities in the 5-to-10-year range sitting at about 2.3%. But he cautioned that five consecutive years of above-target inflation increase the risk that businesses and households begin adjusting their price- and wage-setting behavior if energy prices remain elevated.