- Key takeaway: Federal Reserve Gov. Michael Barr said rising energy costs — already rising in part due to increased electricity demand from data centers — could be made worse by the Iran war, but how much worse depends on how long the Strait of Hormuz remains closed.
- Expert quote: "The most immediate effect is a significant increase in prices, particularly for gas at the pump. Consumers are feeling that a lot and it could bleed over into other prices." — Federal Reserve Gov. Michael Barr.
- What's ahead: The Iran war is already complicating the central bank's longstanding effort to bring inflation down to its 2% target range.
Federal Reserve Gov. Michael Barr said Tuesday that energy costs were already rising before the Iran war, driven by "insatiable demand" for electricity from artificial intelligence and aging infrastructure. But how much higher prices go will depend on how long the war with Iran lasts, he said.
Speaking at an event at the University of Oxford in the United Kingdom, Barr said the U.S. energy sector is more insulated from shocks than those in Europe, though not immune.
"The energy sector is a small part of our overall economy, and U.S. natural gas products are not part of a global market, so we don't have serious constraints on our ability to export natural gas," Barr said. "As a result, natural gas prices have stayed low, even while prices abroad have increased. So we're a little bit insulated from that."
Still, Barr said the war is pushing up prices for gasoline and fertilizer, underscoring the limits of that insulation.
"The most immediate effect is a significant increase in prices, particularly for gas at the pump," he said. "Consumers are feeling that a lot, and it could bleed over into other prices. It's certainly having effects already on fertilizer prices."
The duration of the conflict will be the main factor in determining whether the impact on inflation is temporary or more persistent, Barr said.
"I have no idea when the conflict will be over or how long it will take to reopen the Strait of Hormuz to full capacity," he said. "The longer that goes on, the greater the risk that the inflation we're seeing in these prices becomes embedded in the economy, and then we have to worry more.
"So the duration of the conflict matters a lot, and we're in a situation right now where we really need to wait and see to understand what direction that's going."
His remarks echo those of
"If the Strait of Hormuz opens and trade flows return somewhat to normal, then I can look through the effect of recent higher energy prices on inflation, and my focus will be on how the labor market evolves," Waller said. "If the strait is constrained, I'll have to balance the risks to the two sides of the Fed's dual mandate to determine the appropriate path of policy, and that may mean maintaining the policy rate at the current target range."
At its most recent meeting, the Federal Open Market Committee
"Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook," the committee said in a statement. "The committee is attentive to the risks to both sides of its dual mandate."
