By Bryan Mena, CNN
Washington (CNN) — Just as President Donald Trump looks set to install a Federal Reserve chair aligned with his desire for lower interest rates, the president’s war on Iran likely makes those rate cuts harder to deliver.
Fed policymakers were already expected to keep their benchmark lending rate unchanged until at least the summer, but now economists say the central bank needs to see how the conflict affects the US economy. And that’s on top of another major source of uncertainty: the path of US trade policy after the Supreme Court ruled that a bulk of Trump’s tariffs are illegal.
The US-Israel war with Iran now stands to make it even more difficult for Kevin Warsh, Trump’s nominee to lead the Fed, to make a compelling case for rate cuts this year.
“If headline inflation is going to be extended for some period of time, coming off of five years of elevated inflation, boy, that’s a scenario we need to pay close attention to,” Minneapolis Fed President Neel Kashkari, who votes on policy moves this year, told Bloomberg at a financial event Tuesday. “Now we need to think about this potentially new shock hitting the global economy.”
Warsh’s tough job
Fed officials in their latest economic projections from December estimated just one rate cut for 2026, but investors widely expect Warsh to push for more if he’s confirmed by the Senate to succeed Chair Jerome Powell in May when his term at the helm of the central bank ends.
In December, Warsh said that AI-driven productivity could pave the way for lower interest rates.
But several Fed officials have already said they’re skeptical of that argument, such as Fed Governor Michael Barr and Cleveland Fed President Beth Hammack. That matters because each member of the Fed’s 12-person rate-setting committee has only one vote, so Warsh would need buy-in from a majority of his colleagues to lower rates.
And for now, the potential economic effects of war in the Middle East are a more immediate concern than longer-term effects from AI.
“The Fed’s got to deal with the facts on the ground, and this oil shock has clearer consequences for the economy and inflation,” Ed Yardeni, president of Yardeni Research, a global investment firm, told CNN. “The AI productivity story has been showing some signs of life, but I don’t think it will help Warsh be successful in pushing for a rate cut.”
The war’s impact on inflation depends on its severity and duration as well as the magnitude of the disruption at the Strait of Hormuz, a narrow corridor through which one in five barrels of oil around the world flow.
For example, Goldman Sachs analysts told clients Monday that it expects disruptions will be temporary and oil prices will drop. However, the bank said that if oil price gains stick around, annual inflation, as measured by the Consumer Price Index, could heat up from 2.4% in January to 3% by the end of the year. That would ruin Goldman’s forecast for inflation to end 2026 at 2%, right at the Fed’s target.
The attacks on Iran have already sent US gasoline prices higher, and will likely continue to climb as the war drags on.
“Central banks will not welcome another inflation impulse,” James McCann, senior economist at Edward Jones, said in an analyst note Tuesday. “Indeed, the Fed has not hit its inflation target since early 2021 and against this backdrop there could be greater sensitivity to a pick-up in inflation.”
The other big question mark
Fed officials usually prefer to see how developments that could impact the US economy play out over several months, which includes