Iran Conflict Sparks Inflation, The Fed Signals Holding Interest Rates

Vice Chair of Federal Reserve Supervision, Philip Jefferson, estimates that the conflict in Iran will push up inflation in the short term. On the other hand, he assesses that current interest rates are already in the right position to respond to various possible economic conditions. In his speech in Dallas on Thursday (26/3/2026) local time, Jefferson stated that the rise in inflation is mainly driven by the surge in energy prices due to the conflict in the Middle East. “At least in the short term, I expect overall inflation to increase, reflecting the rise in energy prices stemming from the conflict in the Middle East,” Jefferson said, quoted from Yahoo Finance on Friday (27/3/2026). According to Jefferson, developments in the Middle East conflict and global energy market dynamics still need to be monitored further. He believes it is still too early to conclude their impact on the overall economy. However, he emphasised that the duration of the energy price increase is a key factor. Short-term disruptions are deemed not to have a significant impact on the economy, except for being felt in one to two quarters. Conversely, if oil prices remain high for a long time, the impact could be greater. So far, the rise in oil prices is still considered to have a limited effect on inflation. Nevertheless, consumers have already begun to feel the impact through rising fuel prices. He also warned that if energy prices remain high, households will face difficult choices in spending. Increases in transportation and household energy costs could force people to reduce non-essential spending, such as dining out or retail shopping, and even potentially increase household debt. On the other hand, policy tariff uncertainties as well as the surge in energy prices complicate the central bank’s efforts in controlling inflation while maintaining maximum employment levels. Before the Iran conflict erupted, inflation in the US had already persisted above the 2% target for five years. In the last year, efforts to reduce inflation have even appeared to be slowing.