Federal Reserve Holds Rates, Cites Tariffs and Middle East Tensions for Uncertainty

The Federal Reserve has decided to keep interest rates unchanged in June, with the dot plot still indicating two rate cuts for the year. However, the chair has emphasized that any further rate cuts will depend on confirming the impact of tariffs on inflation. Additionally, the potential escalation of conflicts in the Middle East and unexpected surges in food prices present new obstacles to rate cuts.

On June 19, the Federal Reserve maintained the federal funds rate at 4.25% to 4.5%, as expected. The official statement acknowledged that while net export fluctuations have affected data, recent indicators show continued economic expansion. The unemployment rate remains low, and the labor market conditions are stable. Inflation, however, remains at a high level.

Despite the latest dot plot showing that most Federal Reserve officials still expect two rate cuts in the remaining four meetings this year, consistent with March's forecast, the chair's comments during the press conference cast a shadow over the prospects for rate cuts. The chair stated that the impact of tariffs on inflation needs to be confirmed before any further rate cuts can be considered.

Recent U.S. inflation data shows that while the impact of tariffs has not yet been significantly felt, another risk factor is emerging: rising food prices. Last month, U.S. food inflation increased by 0.3% month-on-month, the fastest pace since 2021 and higher than the average inflation growth rate over the past five months. This trend is not only related to tariff pressures but also to the escalating Middle East situation, which poses additional upward risks. Markets are concerned that Iran may close the Strait of Hormuz as a "desperate strategy," which would not only affect oil flow but also impact the agricultural commodities market. The Strait of Hormuz is a major transportation route for fertilizer producers in the Gulf region, and Iran is one of the world's largest exporters of anhydrous ammonia. Other fertilizer-producing countries like Qatar, Saudi Arabia, and Oman also rely on this waterway.

As the Middle East conflict intensifies, the futures prices of major crops such as corn, wheat, and soybeans have risen significantly. On Wednesday, wheat prices surged by 4.4%, marking the largest single-day increase since July 2023.

While the chair downplayed the risk of the conflict on U.S. energy prices, this optimism does not extend globally. An economist believes that before the escalation of tensions, the global trend of slowing inflation appeared stable despite the uncertainty of tariffs. Tariffs have played a role in suppressing demand, weakening the dollar, and lowering oil prices. However, the Israel-Iran conflict threatens to reverse this trend, with oil prices rising again. If the conflict escalates further, consumer prices will also rise.

Within the Federal Reserve, opinions are becoming more divided over time. Market predictions suggest that by the end of next year, interest rates will be between 3.0% and 3.25%, indicating a larger rate cut than currently predicted by the Federal Reserve. This suggests that traders are more concerned about economic growth than Federal Reserve officials.

An analyst succinctly summarized the current situation: "Take a summer break." Given the chair's frequent mention of price increases due to tariffs, the analyst also believes that the chair may be among those who expect zero or one rate cut this year.

As the uncertainty surrounding the Middle East situation and tariff policies continues, the Federal Reserve's decision-making path becomes increasingly complex. Currently, the chair has chosen to remain patient until geopolitical and trade policies provide clearer signals. For investors, this summer may be longer and hotter than expected.