Fed's Kashkari refuses to rule out rate hikes as Iran conflict stokes inflation
The desk interprets Neel Kashkari's recent comments as a significant indication of the Federal Reserve's cautious stance amid rising inflation risks linked to the ongoing Iran conflict. Per the full note source, Kashkari highlighted that the closure of the Strait of Hormuz, a critical chokepoint for global oil supplies, complicates the Fed's ability to signal future rate cuts. This dovetails with the Fed's current target range of 3.5% to 3.75%, where dissenting voices within the FOMC are increasingly advocating for a more hawkish approach, potentially leading to rate hikes if inflation pressures persist. The market is now left to navigate a landscape of uncertainty, with the Fed's forward guidance under scrutiny as geopolitical tensions escalate.
What the desk is arguing
The desk frames this as a pivotal moment for the Fed, where geopolitical tensions are directly influencing monetary policy decisions. Kashkari's assertion that the Iran conflict raises inflation risks suggests that the Fed may have to reconsider its previously indicated path towards rate cuts. This shift is underscored by the closure of the Strait of Hormuz, which has been a significant factor in rising energy prices, further complicating the inflation outlook.
Supporting this view, Kashkari's dissent at the last FOMC meeting reflects a broader division within the committee, with multiple officials questioning the appropriateness of signaling rate cuts in the current environment. The Fed's decision to maintain its rate target range at 3.5% to 3.75% indicates a cautious approach, but with dissenters advocating for a more flexible stance, the potential for rate hikes is now on the table.
Where it sits in our coverage
Our consensus target for the USD/EUR pair is 1.075, with a range of 1.04 to 1.12. Notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan, which is positioned at the upper bound of our consensus range, while bofa sits at the lower end, indicating a divergence in expectations regarding the Fed's future policy direction.
How other firms see it
Firms like jpmorgan and citi are aligned with the view that the Fed may need to adopt a more hawkish stance, particularly in light of rising inflation risks. Conversely, bofa holds a contrary position, suggesting that the Fed may still lean towards cuts despite the geopolitical tensions.
The trajectory of the USD/EUR pair will be closely tied to the Fed's evolving stance on interest rates, as well as the ongoing developments in the Iran conflict and its impact on global energy prices.
What the calendar says
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Fed's Kashkari says the Iran war raises inflation risks and may force rate hikes, adding the Fed cannot signal cuts are coming while the Hormuz strait remains closed. Summary: Minneapolis Fed President Neel Kashkari said Sunday that a prolonged Iran conflict increases inflation risks and economic damage, limiting the Fed's ability to provide clear rate guidance, according to his appearance on CBS's Face the Nation Kashkari said he could not signal rate cuts were forthcoming and raised the possibility of moving rates higher, citing uncertainty around all aspects of the war, per CBS Face the Nation The Strait of Hormuz, closed since US and Israeli airstrikes on Iran on February 28, handles around 20% of global oil and gas supplies, according to both sources Kashkari was among an unusually large group of dissenters at the most recent FOMC meeting, voting against the language in the monetary policy statement, per both reports The Fed held its rate target range at 3.5% to 3.75% at the latest meeting, retaining language indicating the next move was expected to be a cut, according to the first source Dissenters from the Cleveland, Dallas and Minneapolis regional Fed banks favoured holding rates and leaving the direction open, while Fed Governor Stephen Miran dissented in favour of a cut, per the first source BlackRock's Rosenberg flagged that the Fed is likely to remain divided for a prolonged period, according to the second source Federal Reserve Bank of Minneapolis President Neel Kashkari said on Sunday that the ongoing war between the United States and Iran is raising the risk of sustained inflation and broader economic damage, and that the uncertainty surrounding the conflict makes it impossible for the central bank to offer clear signals on the direction of interest rates. Speaking on CBS's Face the Nation, Kashkari said he was closely focused on the war's effects on both inflation and economic demand, particularly given the continued closure of the Strait of Hormuz, the chokepoint through which roughly a fifth of the world's oil and gas supplies normally flow.
He said he could not signal that rate cuts were coming, and went further, raising the possibility that the Fed might need to move rates in the opposite direction. The comments reflect a notable shift in tone within the FOMC. At the most recent meeting, Kashkari was part of an unusually large dissenting group, joining the leaders of the Cleveland and Dallas regional Fed banks in voting against the language used in the committee's monetary policy statement.
All three regional bank presidents backed holding rates steady while keeping the door open for movement in either direction depending on how the war develops. Fed Governor Stephen Miran also dissented, but in favour of a cut rather than a hold, underscoring the depth of the division within the committee. The Fed ultimately held its benchmark rate target range at 3.5% to 3.75%, retaining language that characterised the next likely move as a reduction.
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