Fed Divided as Iran War Fuels Inflation Concerns

The Federal Reserve is deeply divided over monetary policy as the Iran war continues to disrupt global energy markets and fuel inflation concerns. The conflict has closed the Strait of Hormuz, a critical chokepoint for 20% of global oil and gas supplies, leading to surging energy prices worldwide.

At the Fed's most recent meeting, an unusually large dissent emerged. Minneapolis Fed President Neel Kashkari, joined by the presidents of the Cleveland and Dallas regional banks, opposed language indicating officials collectively viewed the central bank’s next move as a rate cut. Governor Stephen Miran also dissented in favor of a rate cut.

Barclays has become the latest brokerage to bet on no policy easing from the U.S. Federal Reserve this year, citing prolonged high energy prices linked to the Iran war that are likely to keep inflation elevated. The British brokerage had previously forecast a 25-basis-point rate cut in September 2026 but retained its forecast of a quarter point reduction in March 2027.

Global brokerages have steadily pulled back from early-year expectations of two U.S. interest rate cuts in 2026, with forecasts sharply split between some easing and no cuts at all this year due to war-related inflation risks that are making policymakers cautious. Traders are now pricing in a roughly 78.7% probability of no change in interest rates by year-end.

The release of the U.S. employment report later this week will serve as a test of whether the economy remains resilient enough to keep the Federal Reserve's monetary policy on hold, or whether a softening labor market could revive the case for interest rate cuts that the war with Iran has all but buried. Solid economic growth and concerns about war-driven inflation have left markets expecting no rate moves this year.

Bank of America predicts that the Federal Reserve will delay lowering interest rates until the second half of 2027, according to CBS News. Multiple shocks affecting the economy, including the Iran war, tariffs, and emergence of AI, are making it harder to forecast interest rate moves according to BofA analysts.

According to Reuters, Wall Street banks are planning to push for further capital relief before the U.S. November election. The Federal Reserve in March unveiled new relaxed drafts of sweeping capital rules which it estimated would reduce the funds big banks must put aside by around 4.8%. JPMorgan Chase expects its capital will actually increase, while its competitors' will fall.

CNBC reports that Friday's jobs report for April showed a nonfarm payrolls increase of 115,000. Lindsay Rosner, head of multi-sector fixed income at Goldman Sachs Asset Management, said the Fed will shift its focus to containing upside inflation risks now that the labor market appears back on track.