Yellen sees one Fed rate cut still possible this year, despite inflation risks from the Iran war shifting market expectations away from easing.
Summary:
- Janet Yellen sees one Fed cut still possible this year
- Iran war driving broad supply shock, lifting inflation pressures
- Markets have priced out cuts despite earlier expectations
- Fed remains data-dependent with uncertainty elevated
- Policy outlook caught between inflation risks and growth concerns
Former Fed Chair and US Treasury Secretary Janet Yellen said the Federal Reserve could still deliver one interest rate cut later this year, even as the Iran war fuels inflationary pressures and complicates the policy outlook.
Speaking at the HSBC Global Investment Summit in Hong Kong, Yellen noted that while short-term inflation expectations have edged higher, policymakers are likely to remain flexible. She suggested that, if forced to make a call, a single rate cut later in the year would be her base case.
Her comments come as the Fed continues to hold rates steady in the 3.50%–3.75% range, with previous projections indicating that at least one cut could be appropriate in 2026. However, the macro backdrop has shifted materially. The Iran war has triggered a sharp rise in energy prices, with oil up more than 30%, feeding into higher inflation and increasing uncertainty across global markets.
Yellen described the conflict as a broad supply shock, warning that its effects are already visible in recent inflation data and are likely to intensify. US consumer prices have surged, driven in part by sharp increases in gasoline and diesel costs, marking the strongest gains in several years.
This has led to a notable divergence between policy expectations and market pricing. While Fed projections still leave room for easing, traders have largely priced out rate cuts this year, reversing earlier bets for multiple reductions.
Political pressure remains a factor. President Donald Trump has continued to criticise Fed Chair Jerome Powell for not cutting rates more aggressively, while backing a more dovish policy stance from potential successor Kevin Warsh.
Taken together, the outlook reflects a delicate balancing act. The Fed faces rising inflation risks from energy shocks, but also growing uncertainty around growth, leaving the path for rates highly contingent on incoming data
