Iran war prompts wait-and-see stance to pricing, hiring, investment: Fed

Dive Brief:

Uncertainty created by the Iran war has prompted U.S. companies to delay decisions on hiring, pricing and capital investment while pushing up costs for energy and petroleum-based products such as plastics and fertilizer, the Federal Reserve said Wednesday.
Overall price pressures persisted at a moderate level, and increases in input costs exceeded increases in selling prices, shrinking profit margins, the Fed said in its so-called Beige Book survey of the economy across its 12 districts. Economic activity “increased at a slight to modest pace,” the central bank said.
“The conflict in the Middle East was cited as a major source of uncertainty that complicated decision-making around hiring, pricing, and capital investment, with many firms adopting a wait-and-see posture,” the Fed said.

Dive Insight:

At their latest meeting on March 17-18, a growing number of Fed officials voiced concern that the Iran war may increase price pressures while noting that the central bank may need to increase the benchmark interest rate to stop inflation from rising further from their 2% target, according to minutes of the gathering released on April 8.

Several policymakers have said in recent weeks that they aim to take a “wait-and-see” approach to borrowing costs, holding the main interest rate at a range between 3.5% and 3.75% until they recognize a need to either cool inflation or spur growth to avert higher unemployment.

“My baseline is that we're going to be on hold for some time, but I do think that there's a risk that we might need to be either more accommodative or more restrictive in policy,” Cleveland Fed President Beth Hammack said Wednesday in a CNBC interview.

Hammack declined to forecast when the Fed may alter monetary policy.

“I think it's just too early to say, we've had a series of these supply shocks over the past couple of years,” she said, referring to events such as a jump in fuel prices since the start of hostilities with Iran, the imposition of tariffs in April 2025 and the plunge in economic activity during the pandemic.

Fed officials at their March meeting forecast that they will trim the main rate by a quarter point this year, according to median projections.

Central bank policymakers should avoid raising interest rates too early in response to inflationary pressure from the Iran war, International Monetary Fund Managing Director Kristalina Georgieva said Wednesday. Premature tightening could crimp economic growth, she said.

“It is important that the central banks act carefully,” she told Bloomberg Television.

“Those that are in a good position of credibility, they can take a wait-and-see attitude,” she said, adding “they also have to signal ‘we are prepared to act if necessary.’”

The U.S. economy will likely grow 2.3% this year, the IMF forecast Tuesday, marking down its forecast in January by 0.1 percentage point because of the war.

Each passing week, however, increases the probability of a worst case scenario, in which oil prices persist at $110 per barrel on average and global growth slumps below 2%, IMF Chief Economist Pierre-Olivier Gourinchas said during a press briefing on Tuesday.

All is not gloomy for the economy across the Fed’s 12 districts, according to the Beige Book, which draws from information collected before April 6.

Manufacturing activity “increased slightly to moderately in most districts,” while the banking sector was steady, with “loan demand stable to up moderately,” the central bank said.

Also, consumer spending edged up despite higher fuel prices and, in some regions, harsh winter weather, the Fed said.

At the same time, “many districts continued to report signs of consumer financial strain, increased price sensitivity and rising demand at food banks and other social service organizations, while spending among higher-income consumers was resilient,” the central bank said.

Many consumers are suffering as the Iran war sustains excessive inflation, Hammack said.

Consumers “feel the price of gasoline at the pump every time they go to refill their cars, and so it really can weigh on them,” she said, noting that groceries that cost $100 five years ago now cost $120.