A top Federal Reserve official said Monday that an interest rate hike could be necessary if inflation remains persistently above the central bank’s 2 percent target—the latest sign that some policymakers are shifting away from a bias toward cutting borrowing costs, even as the Iran war continues to roil global energy markets.
Why It Matters
The comments from Beth Hammack, president of the Federal Reserve Bank of Cleveland, come as the war enters its sixth week, sending gas prices surging nationwide and raising fresh fears about the U.S. economic outlook. The prospect of rate hikes would mark a sharp reversal from late last year when the Fed cut its benchmark rate three times. A hike would also put the central bank on a direct collision course with President Donald Trump, who has called for rates to be slashed to 1 percent.
Meanwhile, JPMorgan Chase CEO Jamie Dimon warned in his annual shareholder letter Monday the conflict could trigger “significant ongoing oil and commodity price shocks”—potentially driving inflation higher and interest rates beyond what markets currently expect.
What To Know
Hammack told the Associated Press that while she would prefer the Fed hold its benchmark rate steady “for quite some time,” she acknowledged the path forward depends heavily on how the economy responds to war-driven energy costs.
“I can foresee scenarios where we would need to reduce rates…if the labor market deteriorates significantly,” she said. “Or I could see where we might need to raise rates if inflation stays persistently above our target.”
“Inflation has been running above our target for more than five years now,” Hammack said, adding a further increase would mean it’s “moving in the wrong direction, away from our 2 percent objective.”
The Cleveland Fed’s own projections show inflation could reach 3.5 percent this month—the highest since 2024. Economists surveyed by FactSet forecast annual inflation will jump to 3.1 percent in March, up from 2.4 percent in February, with monthly consumer prices rising 0.8 percent—which would be the largest single-month increase in nearly four years.
Gas prices have averaged $4.12 a gallon nationwide as of Monday, according to AAA—up 80 cents from a month ago, with prices reaching as high as $10 a gallon in parts of California. The surge is tied directly to Iran’s closure of the Strait of Hormuz, the narrow waterway through which roughly 20 percent of the world’s oil supply flows. Insurers have raised premiums or suspended coverage for tankers traversing the route, while shipping companies have rerouted vessels around Africa, adding weeks and significant cost to deliveries.
Energy analyst Patrick De Haan, head of petroleum analysis at GasBuddy, cautioned Monday that even a ceasefire would not immediately ease prices. The real variable, he said, is whether the Strait can physically and safely reopen—and markets will not react until tankers are actually moving again.
Egypt, Pakistan, and Turkey have submitted a draft proposal to Iran and the United States calling for a 45-day ceasefire and the reopening of the Strait of Hormuz, according to two Middle East officials who spoke to the AP on condition of anonymity.
However, Iran rejected the ceasefire proposal and said it wants a permanent end to the war, the AP reported, while Trump appeared to widen his threat from civilian targets to the entirety of the Islamic Republic ahead of his Tuesday ultimatum.
“The entire country can be taken out in one night, and that night might be tomorrow night,” he said during a news conference at the White House.
What People Are Saying
President Donald Trump, via Truth Social on Friday: “With a little more time, we can easily OPEN THE HORMUZ STRAIT, TAKE THE OIL, & MAKE A FORTUNE. IT WOULD BE A ‘GUSHER’ FOR THE WORLD??? President DONALD J. TRUMP.”
JPMorgan Chase CEO Jamie Dimon said Monday: “Now, because of the war in Iran, we additionally face the potential for significant ongoing oil and commodity price shocks, along with the reshaping of global supply chains, which may lead to stickier inflation and ultimately higher interest rates than markets currently expect.”
Patrick De Haan, Head of Petroleum Analysis, GasBuddy, via X: “A cease-fire itself would do little or nothing to impact oil prices directly, unless it directly and clearly impacts the current de-facto shutdown status of the Strait of Hormuz.”
He added: “If and when the Strait can fully re-open, only after confidence and verification allows ships to start transiting the Strait will oil prices in time decline as confidence builds.”
White House press secretary Karoline Leavitt recently said: “Once the national security objectives of Operation Epic Fury are fully achieved, Americans will see oil and gas prices drop rapidly, potentially even lower than they were prior to the start of the operation.”
AAA said in a press release last week: “Crude oil prices have been surging, surpassing $100/barrel, as the conflict in the Middle East continues and the Strait of Hormuz remains closed. In 2022, gas prices remained elevated from March through August, peaking in June when the national average reached a record of $5/gallon for one week.”
What Happens Next
The government will release the Fed’s preferred inflation gauge for February on Thursday, followed by the full March consumer price index on Friday—the first report expected to reflect the full impact of war-driven energy costs.
Even if a ceasefire is reached, analysts warn that pump prices will lag behind any crude oil declines, as tanker safety verification could take days or weeks and traffic through the Strait of Hormuz would ramp up gradually.
Reporting from the Associated Press contributed to this article.