On Friday, Federal Reserve officials continued to signal that the central bank may need to raise interest rates in the future if the conflict in the Middle East leads to a sustained increase in already elevated inflation. Even traditionally dovish policymaker and Fed Vice Chair for Supervision Michelle Bowman acknowledged this potential shift in monetary policy outlook. Speaking at a conference in Iceland, Bowman stated that the war and the resulting energy shock could alter her view on the interest rate path. "It seems too early to assess the scale and persistence of the economic impact from the Iran conflict," she said, but added, "If supply disruptions persist into the second half of the year, we might begin to see broader effects on inflation." Bowman noted that if this occurs, she would be more likely to "consider shifting my approach to thinking about the balance of risks," hinting at the possibility of a rate increase. Several of Bowman's Fed colleagues share concerns that the current energy shock may be difficult to dismiss as a temporary factor, especially since inflation has remained above the Fed's 2% target for years. This perspective has led these officials to consider raising rates to bring price pressures back under control. Minneapolis Fed President Neel Kashkari, one of three policymakers who dissented in favor of a more hawkish stance at last month's Fed meeting, stated, "I think it's too early to conclude we need to raise rates immediately, but it makes me focus more on the risk that inflation could continue to climb and inflation expectations could become unanchored." Financial markets are now betting that the Fed's next move will be to increase its benchmark rate, potentially raising it from the current 3.50%-3.75% range before year-end. Prior to the outbreak of the U.S.-backed war against Iran, Fed officials had been focused on potential rate cuts. The conflict has caused significant supply chain distortions and a surge in energy prices. Philadelphia Fed President Patrick Harker, speaking to a business group in New Jersey on Friday, remarked that monetary policy is currently "in a good place" given unacceptably high inflation pressures and economic uncertainty. Harker added that the Fed is prepared to "respond." While he believes U.S. monetary policy is appropriately positioned, he noted, "I think it's healthy that market participants have priced in both a scenario where the federal funds rate stays higher for longer and a scenario where further tightening is needed." However, as San Francisco Fed President Mary Daly stated in an interview, "There is no urgent need to adjust rates." "Policy is in a good place," she added—a phrase often used by Fed policymakers to signal willingness to hold rates steady—and indicated that any future moves may depend on when the Iran war actually concludes. Oil futures fell over 2% on Friday and were on track for their largest weekly decline since early April, following reports that the U.S. and Iran had reached an agreement to extend a ceasefire for another 60 days. Inflation Data Raises Concerns Daly said that if oil futures prices "begin to drift higher because the conflict persists, then that would change my view of the economic outlook on the inflation side." She also plans to monitor closely whether service sectors begin raising prices, a concerning sign that inflation could become more persistent. So far, she has observed little evidence of this outside industries where fuel costs constitute a significant portion of overall expenses. Nonetheless, inflation risks are clearly increasing for the Fed, at least in the near term. According to data released Friday, a New York Fed gauge designed to capture underlying inflation dynamics jumped to 4% in April from 3.5% in March. Prices for goods and services excluding housing accelerated month-over-month in April. Furthermore, data released by the U.S. government on Thursday showed the Personal Consumption Expenditures (PCE) price index rose 3.8% year-over-year in April, up from 3.5% in March. Kansas City Fed President Jeffrey Schmid, speaking at the same conference as Bowman, stated his "primary concern is inflation, which is too hot and has been above target for too long." He added that the textbook strategy of viewing an energy shock as having no lasting impact and looking through it is not workable in the current environment. Schmid also mentioned the potential use of the Fed's balance sheet to help contain the price outlook. "At this stage, we are not very restrictive. I think there are conversations... we need to start thinking about what tools we have to actually make it more restrictive," depending on how the oil shock evolves. "Perhaps we will look at the balance sheet again as another... tool to create some restriction," Schmid said. His views on the balance sheet may contrast with those of the new Fed Chair Kevin Warsh, who is skeptical about using the central bank's bond holdings to complement its interest rate policy.