Fed Faces Pressure to Act as Iran Conflict Drags On

The ongoing conflict in Iran is testing the Federal Reserve's patience as it navigates higher energy prices and inflation. Oil prices have remained elevated, surpassing $90 a barrel after renewed fighting this week, despite dipping from highs above $100 during the peak of the conflict. The war has dragged on for seven months with no clear resolution, creating challenges for the Fed to look past the shock.

The central bank typically looks through energy shocks, assuming prices will normalize and raising rates would slow an economy already affected by higher oil prices. However, it's becoming increasingly difficult for the Fed to ignore the persistent source of inflation.

Inflation has retreated from pandemic highs but remains above the Fed's target of 2%, with core measures also firmer than expected in the first half of the year. Energy prices are not the only concern, as a renewed trade war with Canada and higher costs for skilled labor and computer chips due to the artificial intelligence build-out are also pushing up prices.

Mark Williams, a finance lecturer at Boston University's Questrom School of Business and former bank examiner at the Fed, said, 'Maybe it is our reality that uncertainty will continue, energy prices will continue higher, inflation will be more embedded in our economy.' He believes the Fed needs to raise interest rates.