NY Fed's Williams sees stagflation risk as war lifts oil over $100

New York Fed President John Williams warned Thursday the Iran war presents a significant stagflationary risk to the US economy, noting signs of slowing growth and accelerating inflation have already emerged and could delay any potential interest rate cuts this year.

"This has begun to play out already," Williams said in a speech, expressing concern over the war's economic impact just as the Fed's benchmark policy rate sits at a two-decade high of 5.25-5.50 percent.

The comments follow oil prices topping $100 a barrel after President Trump announced a naval blockade of the Strait of Hormuz, a critical channel for global energy shipments. The surge reversed a brief dip in crude prices earlier in the week on ultimately false hopes of a ceasefire, a move that had seen US stocks climb and bond yields fall.

Williams' remarks frame the Federal Reserve's growing dilemma: the war's inflationary effects argue against cutting rates, while the concurrent drag on economic activity makes holding them at current levels for longer increasingly painful. Markets are now pricing in fewer rate cuts for 2026 than previously expected before the conflict began 43 days ago.

The economic shockwaves from the conflict are expanding. The US blockade of Iranian ports is set to drain more supply from an already tight oil market, with International Monetary Fund Director Kristalina Georgieva stating the impact is already "baked" into the economy. "We are going to see some drag of this crisis over the year," Georgieva said, pointing to stalled tankers and damaged energy infrastructure.

Hormuz Blockade Amplifies Supply Shock

President Trump's decision to blockade the Strait of Hormuz, through which nearly a tenth of the world's aluminum and a significant portion of global oil flows, is magnifying the economic fallout. Aluminum prices surged to a four-year high on the news, according to the Wall Street Journal. The disruption is already causing tangible effects in Asia, where some factories are slashing production and airports face jet fuel shortages.

The last time a similar naval blockade occurred in the region, it preceded a 15% spike in oil prices over the following three months, leading to a marked slowdown in global GDP. The current conflict has already pushed average US gasoline prices to $4 a gallon as of late March.

Fed's Path Forward Clouded

The geopolitical turmoil complicates the Federal Reserve's next moves. Before the conflict, the central bank was widely expected to begin an easing cycle in the second half of the year. However, with the war now fueling price pressures, the timeline for any rate reduction is uncertain.

Roger Altman, founder of Evercore, noted on CNBC that a blockade's effects could take months to fully work their way through the economy, injecting significant uncertainty. This sustained inflationary pressure from energy and commodity shocks gives the Fed less room to maneuver should economic growth slow more than anticipated.

This article is for informational purposes only and does not constitute investment advice.