Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, said the war in Iran adds uncertainty to the Fed’s next interest-rate move [1].
This shift in outlook matters because it signals that the U.S. central bank may struggle to provide the predictable forward guidance that markets rely on to price assets. The volatility introduced by geopolitical conflict disrupts the Fed's ability to forecast inflation and economic growth with precision.
Kashkari said that the conflict limits the central bank’s ability to offer clear guidance on future policy [2]. Because of these variables, he said the next change in rates could be either a cut or a hike [3].
According to Kashkari, the prolonged nature of the conflict increases the likelihood of economic instability. "The longer the Iran war goes on, the greater the risks of higher inflation and economic damage," Kashkari said [2].
The uncertainty is driven by the potential for oil-price shocks and broader economic damage resulting from the war [2, 4]. These factors create a contradictory environment where the Fed may need to fight inflation with higher rates, while simultaneously addressing economic slowdowns [4].
Kashkari said the Federal Open Market Committee should adjust its communication strategy to reflect this volatility. "I believe the FOMC should offer a policy outlook that signals that the next rate change could be either a cut or a hike," Kashkari said [3].
“The longer the Iran war goes on, the greater the risks of higher inflation and economic damage.”
The Federal Reserve typically attempts to signal its intentions months in advance to prevent market shocks. By suggesting that the next move could swing in either direction—a hike to combat war-driven inflation or a cut to support a damaged economy—Kashkari is warning investors that the 'predictable' era of monetary policy is currently suspended due to geopolitical instability.
