Yellen says Iran conflict puts Fed on hold, complicates rate cuts

Investing.com -- Former Treasury Secretary Janet Yellen said the Iran conflict will hit US economic growth and increase inflationary pressures, making the Federal Reserve more reluctant to cut interest rates.

"I think the recent Iran situation puts the Fed even more on hold, more reluctant to cut rates than they were before this happened," Yellen said via video to a conference Monday in Long Beach, California.

Inflation is running about a percentage point above the Fed's 2% target, Yellen noted. President Donald Trump's tariffs have contributed around half a percentage point of the current 3% pace, she said.

Before the Iran shock, the Fed had addressed labor-market weakness and was waiting for inflation to move down. Oil prices have moved up considerably due to the Iran situation, Yellen said, speaking to S&P Global's TPM26, a shipping industry conference.

If the closure of the Strait of Hormuz lasts beyond a matter of days, prices may remain elevated or go higher, Yellen said. Much of the region's oil gets shipped through the strait.

The Fed has to worry that market participants will say the central bank got inflation down to 3% but is not serious about getting it down to 2%, Yellen said. If that psychology takes hold, the Fed is worried about permanently higher inflation and worsened tradeoffs, which is why the central bank may be even more on hold, she added.

Apart from the serious risks including the Iran conflict, Yellen said the US economy is pretty healthy right now and she is optimistic about the economic outlook.

Yellen also addressed Trump administration moves regarding the Fed. The president's attempt to remove Governor Lisa Cook was "all but unthinkable," she said. The Supreme Court is yet to opine on that, but Trump will probably lose, Yellen added.

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