The Federal Reserve Board published a speech by Governor Christopher J. Waller assessing the U.S. economic outlook and outlining how the Federal Open Market Committee’s policy path could shift depending on whether Middle East energy disruptions ease or persist. He argued that, prior to the Iran conflict, inflation would have been close to the 2 percent goal once tariff effects are stripped out, but the surge in energy prices has lifted measured inflation and could, if prolonged, risk a more durable rise in inflation via expectations and broader pass-through. Waller highlighted a sharp slowdown in labor supply growth as a key complication for interpreting labor market data, citing net immigration of 2.3 million in 2024 falling to around 400,000 in 2025 and expected by some to be around zero in 2026, alongside population aging. With labor force growth near zero, he suggested the pace of job creation needed to keep unemployment steady is likely close to zero, making month-to-month payroll volatility less informative even as he sees vulnerability in low hiring and job-finding rates. On inflation, he cited February personal consumption expenditures inflation of 2.8 percent (3.0 percent core) and said staff estimates imply underlying inflation excluding tariff effects is close to 2 percent, but noted gasoline prices have risen by more than one-third since the conflict began and Brent has moved from about USD 61 per barrel at the start of the year to around USD 95 recently; March consumer price index energy inflation rose 10.8 percent and estimates point to March PCE inflation around 3.5 percent headline and 3.2 percent core. For policy, he framed two stylized cases: if the Strait of Hormuz reopens and trade flows normalize, he would be inclined to look through the energy-driven inflation spike and be cautious about cutting rates immediately, with greater openness to cuts later in 2026 to support the labor market. If the Strait remains constrained and energy prices stay high, he would watch for supply-chain effects and a rise in longer-term inflation expectations, and said the appropriate response could involve maintaining the policy rate at its current target range if inflation risks outweigh labor market risks.
Federal Reserve Board 2026-04-17
Federal Reserve Board Governor Waller sets out scenarios for monetary policy after Iran conflict drives energy shock and labor force growth stalls
The Federal Reserve Board published a speech by Governor Christopher J. Waller assessing the U.S. outlook and indicating that the Federal Open Market Committee’s policy path will depend on whether Middle East energy disruptions ease or persist. He noted that underlying inflation is close to 2 percent but that the recent surge in energy prices has pushed up measured inflation and could become more persistent. Waller outlined that if energy markets normalize he would be inclined to look through the temporary inflation spike and consider rate cuts later in 2026, whereas prolonged disruptions and elevated inflation expectations could warrant keeping the policy rate at its current target range.