US Stock Market: Fed officials warn Iran War could trigger prolonged inflation shock

Federal Reserve officials warned on Wednesday that the ongoing U.S.-backed war with Iran is increasing the risk of a prolonged inflation shock, as elevated oil prices and mounting supply chain disruptions begin to ripple across the economy, as per a report by Reuters.

According to the report, Chicago Federal Reserve President Austan Goolsbee said business leaders initially viewed the spike in oil prices after the conflict began on February 28 as temporary and manageable. However, executives are now increasingly concerned that persistently high energy prices could create severe supply chain pressures similar to those seen during the COVID-19 pandemic.

Austan Goolsbee said that companies are already beginning to experience shortages of industrial chemicals and other key inputs, while rising fuel prices are pushing up transportation and shipping costs. He noted that the longer the conflict continues, the greater the risk that businesses will exhaust existing inventories and face broader operational disruptions.


Goolsbee also said that the economic impact so far has been primarily inflationary rather than stagflationary. However, he warned that a prolonged period of elevated inflation would increase concerns within the Federal Reserve about the broader economic outlook.

Inflation in the United States remains well above the Fed’s 2% target, and financial markets are now expecting interest rates to remain elevated for an extended period. Investors see little chance of a rate cut for at least another year, as per the report.

Separately, St. Louis Federal Reserve President Alberto Musalem said inflation risks are becoming more dominant in the Fed’s policy considerations, according to Reuters. He indicated that interest rates may need to remain unchanged for some time and acknowledged that further rate hikes cannot be ruled out.

Musalem said inflation pressures are spreading beyond tariffs and energy prices, with higher costs emerging across industrial inputs such as aluminum, helium and diesel fuel. He also warned that deteriorating business confidence could slow hiring even as companies continue raising prices.

Oil markets have remained volatile amid uncertainty surrounding the Middle East conflict. Benchmark crude prices briefly declined following reports of possible progress towards a settlement before rebounding above $100 per barrel. Meanwhile, average U.S. gasoline prices have surged from around $3 per gallon to more than $4.50 per gallon, according to data from AAA cited by Reuters.

The New York Fed’s measure of global supply chain pressure climbed to its highest level since July 2022, reflecting renewed strains on manufacturing and logistics networks.

The comments from Goolsbee and Musalem underscore a growing shift within the Federal Reserve toward concerns that inflation could remain stubbornly high. Federal Reserve Chair Jerome Powell recently acknowledged increasing discussion within the central bank about the possibility that additional rate hikes may eventually be required.

The Personal Consumption Expenditures Price Index, the Fed’s preferred inflation gauge, rose to 3.5% in March from 2.8% in February, while core inflation accelerated to 3.2%. Economists surveyed by Reuters expect upcoming consumer inflation data for April to show another increase.

Attention is also turning to the April U.S. employment report due on Friday. Economists polled by Reuters expect the unemployment rate to remain steady at 4.3%.