Federal Reserve Governor Waller Adopts Cautious Stance on Rate Cut, Warns of Long-Term Inflation Risk

April 18, Federal Reserve Governor Christopher Waller said he’s cautious about near-term interest rate cuts due to an energy shock from the Iran conflict, warning the unrest could sustainably impact inflation. In his remarks, Waller outlined two key scenarios: 1. **If the Strait of Hormuz reopens and trade flows normalize**: Officials can look past the energy price surge and shift focus to a weakening job market later this year. “If that happens, I think underlying inflation could keep falling toward the 2% target—meaning I’d be wary of cuts now, and more likely to support a cut later this year when the outlook is stable,” he noted. 2. **Risk of prolonged conflict**: Waller warned oil prices and markets have underestimated this risk. “On inflation, the longer the conflict drags on and energy prices stay high, the more likely those costs will seep into other prices as businesses factor energy expenses into their pricing,” he said. He added that if prolonged conflict unfolds alongside a weak job market, it will limit policy response space. In that case, he’ll weigh risks between higher inflation and a weaker labor market: “If inflation risks outweigh labor market risks, that could mean keeping the policy rate in its current target range.” (FX678)