"Middle East Conflict Raises Rate Hike Prospect"... March FOMC Minutes Reveal 'Two-Sided' Policy Discussion

Energy Prices Surge Amid Middle East Conflict

Some Members Mention Rate Hikes Due to Inflation Concerns

Significant Impact on Long-Term Inflation Expectations

Jerome Powell, Chairman of the Federal Reserve (Fed). Photo by Reuters Yonhap News.

It has been confirmed that members of the Federal Reserve (Fed) discussed a 'two-sided' approach at the March Federal Open Market Committee (FOMC) meeting, leaving open the possibility of not only a rate cut but also a rate hike. This was due to concerns that the surge in international oil prices stemming from the Middle East conflict could push up long-term inflation expectations.

According to the minutes of the March FOMC regular meeting released by the Fed on April 8 (local time), Fed officials assessed that there has been "no further progress in slowing inflation" in recent months.

Participants identified the rise in energy prices due to the war involving Iran as a key variable for future price trends. The price of near-term crude oil futures surged by about 50% during the period of the conflict. However, since the increase in long-term futures prices was relatively modest, the market expected the sharp rise in oil prices to be short-lived.

Fed governors slightly raised their inflation outlook compared to January and noted that upside risks have increased. This was attributed to greater uncertainty caused by the Middle East conflict, changes in government policies, and the introduction of artificial intelligence (AI).

The most notable aspect of the March FOMC minutes was the discussion on a 'two-sided' approach to rates. Most members maintained the view that a long-term rate cut would be appropriate if inflation declines as expected. However, some suggested that, in light of recent inflation indicators, the timing of a cut should be delayed.

On the other hand, some participants stated, "If inflation continues to exceed the target level, it may be appropriate to raise the target range for the federal funds rate." This is because if the surge in oil prices driven by the Middle East conflict persists, inflation could become more entrenched. In addition, since inflation has exceeded the target for several years since 2021, long-term inflation expectations may respond more sensitively to rising energy prices.

Accordingly, the minutes noted that some participants believed there was a strong case to include a 'two-sided description' in the statement, indicating both the possibility of a rate cut and a rate hike in future decisions.

Furthermore, all participants agreed that monetary policy does not follow a predetermined path and will be decided based on data available at each meeting.

This discussion shows that, compared to the January meeting—when only a limited number of members mentioned the possibility of a rate hike—concerns about inflation risks have grown stronger recently due to the outbreak of war and other developments.

Meanwhile, at the March FOMC, the Fed kept the benchmark interest rate unchanged at 3.50% to 3.75%. Fed Governor Stephen Miran was the only member to dissent, favoring a rate cut of 0.25 percentage points.

This content was produced with the assistance of AI translation services.