Fed's Waller: If energy prices are unwound in a few weeks or a couple of months, it will cause a problem for the Fed

Fed's Waller: If energy prices are unwound in a few weeks or a couple of months, it will cause a problem for the Fed

Federal Reserve Governor Christopher Waller has warned that a rapid decline in energy prices could complicate the central bank's policy path, echoing broader concerns about the inflationary risks posed by recent Middle East tensions. With oil prices surging over 13% since late February due to U.S.-Israeli military actions against Iran, market expectations for rate cuts have dimmed significantly. Futures markets now price in just a 30.7% chance of a June rate reduction, down sharply from 49.6% a week earlier, while the likelihood of a July cut stands at 47.2%.

The Fed's January policy statement, which maintained rates at 3.5–3.75%, reflected a divided committee, with Waller and Stephen Miran dissenting in favor of a cut. Waller's stance has grown more cautious amid rising energy costs, which threaten to prolong inflation above the 2% target. While the Dallas Fed notes that energy price shocks typically have limited long-term inflationary effects, they can temporarily elevate inflation expectations. Current data shows gasoline prices rising 10 cents per gallon in 24 hours, with further increases likely.

If energy prices stabilize or decline rapidly, Waller's warning suggests the Fed may face renewed pressure to balance inflation control with economic growth. However, with the Strait of Hormuz disrupted and oil markets volatile, policymakers remain focused on assessing whether higher energy costs will embed themselves in broader price trends. The central bank is widely expected to hold rates steady at its March meeting, with markets pricing in a 90% probability of another pause.