Federal Reserve Governor Christopher Waller stated on Friday that the war in the Middle East could drive inflation higher in the short term, presenting significant challenges for monetary policymakers. However, he also noted that if the situation de-escalates rapidly, the possibility of additional interest rate cuts later this year remains.

In prepared remarks for a speech at Auburn University, Waller said, "The longer energy prices stay elevated and the Strait of Hormuz remains disrupted, the greater the risk that inflation will spread broadly across goods and services, supply chain effects will gradually emerge, and real economic activity and employment will begin to slow."

He pointed out that if high inflation coincides with weakening employment, he would need to balance the risks between the Fed's dual mandate objectives to determine the appropriate policy path. Should inflation risks outweigh labor market risks, this could imply maintaining the policy rate within the current target range.

He added that if the conflict is resolved swiftly, he expects core inflation to continue moving toward 2%, which currently makes him cautious about cutting rates but more inclined to support the job market with rate reductions later in the year once the economic outlook stabilizes.

Waller highlighted that the current situation involves considerable uncertainty, making it increasingly difficult for the Fed to dismiss what are typically temporary economic shocks. Policymakers must remain highly vigilant in the face of successive shocks, as repeated disruptions could keep inflation elevated for an extended period.

Regarding the near-term outlook, Waller projected that the March Personal Consumption Expenditures (PCE) price index would reach 3.5%, well above the Fed’s 2% target. He also noted that shifts in the labor market imply that the number of new jobs needed to keep the unemployment rate stable is now close to zero, meaning a single month of job declines does not necessarily signal a recession.

Waller’s remarks may be the last public comments on monetary policy from a Fed official before the blackout period ahead of the April 28–29 Federal Open Market Committee (FOMC) meeting. The meeting is widely expected to keep the current interest rate target range of 3.5% to 3.75% unchanged while continuing to assess the economic impact of the Middle East conflict.

Amid rapidly changing developments in the war involving the U.S., Israel, and Iran, Fed officials have been cautious in discussing future rate moves. The conflict has driven a sharp rise in energy prices, pushing up already elevated headline inflation and posing significant risks that core inflation—also above the Fed’s 2% target—could increase further.

New York Fed President John Williams said on Thursday that he expects headline inflation to remain significantly above 3% in the coming months. With so much uncertainty, now is not the time for strong forward guidance, he noted.

Waller’s comments come as the situation evolves rapidly. If recent diplomatic efforts continue to advance, the economic outlook may improve.

On Friday, Iran announced that the Strait of Hormuz was fully open during an ongoing ceasefire, although the U.S. indicated it would maintain a blockade on Iranian ports. Oil prices fell sharply, stocks rose, and investors increased their expectations for Fed rate cuts later this year.