The US Federal Reserve is weighing whether to raise interest rates for the first time in years as the Iran war drives up fuel costs and pushes inflation further above target.
A senior US Federal Reserve official has raised the prospect of an interest rate hike for the first time in years, warning that the Iran war's impact on fuel costs could push inflation beyond the central bank's control.
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Beth Hammack, president of the Federal Reserve Bank of Cleveland, told the Associated Press on Monday that while her preference is to hold the benchmark rate steady "for quite some time," a hike could become necessary if inflation stays stubbornly high.
"I could see where we might need to raise rates if inflation stays persistently above our target," she said.
It would mark a sharp reversal from late last year, when the Fed cut its key rate three times. Hammack also left the door open to cuts, but only if the labour market takes a significant hit.
"I can foresee scenarios where we would need to reduce rates if the labour market deteriorates significantly," she said.
Cutting rates makes borrowing cheaper, encouraging businesses to invest and hire — a tool the Fed typically reaches for when unemployment is rising and the economy needs a boost.
Inflation heading the wrong way
The numbers are already moving in the wrong direction. Economists forecast annual inflation will jump to 3.1% in March, up from 2.4% in February and Hammack's own estimates suggest it could hit 3.5% in April, the highest since 2024.
"Inflation has been running above our target for more than five years now," she said, adding that a further rise would mean it is "moving in the wrong direction, away from our 2% objective".
The US government will release its March inflation report on Friday, which will offer the first clear read on the impact of surging energy costs since the conflict began on 28 February.
Petrol pain at the pump
Gas prices have climbed sharply since the war broke out, averaging $4.12 (€3.80) per gallon nationally on Monday, up 80 cents from a month earlier.
For Hammack, whose district covers Ohio and parts of Pennsylvania, West Virginia and Kentucky, the message from the ground is unambiguous.
"Rising gas prices are the No. 1 thing I hear about from people in my district," she said.
"We know that causes a lot of pain personally, as it eats up a bigger and bigger share of people's paychecks."
A Fed caught between two fires
The Fed is legally required by Congress to pursue both low inflation and maximum employment — and right now, the Iran war threatens both simultaneously.
Higher fuel costs could prompt consumers to cut back on spending, slowing growth and pushing up unemployment. That would normally call for rate cuts, but persistent inflation pulls in the opposite direction entirely.
How the conflict ultimately shapes the US economy will depend on its duration and how far energy prices climb.
Now in its sixth week, the war has already lasted longer than Hammack anticipated when the Fed last met on 17-18 March.
Trump factor
A rate hike would almost certainly put the Fed on a collision course with US President Donald Trump, who has repeatedly lambasted the central bank for not cutting rates faster and has called for its benchmark rate to be slashed to 1% — less than a third of its current level of around 3.6%.
Other Fed officials have also signalled openness to hikes, including Austan Goolsbee, president of the Chicago Fed.
Minutes from the Fed's January meeting showed several of the 19 rate-setting committee members supported language acknowledging the possibility of "upward adjustments".
