Fed’s Cook flags a clear shift toward inflation risk, driven by tariffs and the Iran war, with markets now dialing back expectations for rate cuts.

Summary:

• Fed’s Cook signals shift toward inflation risk amid Iran war shock
• Energy-driven inflation pressures seen pushing Fed further from 2% target
• Prior disinflation progress already derailed by tariffs, now compounded by geopolitics
• Balance of risks moving away from neutral toward upside inflation concerns
• Market pricing reflects this shift, with reduced expectations for Fed rate cuts

Federal Reserve Governor Lisa Cook signalled a clear shift in the policy risk balance toward inflation, as escalating geopolitical tensions and the ongoing Iran conflict raise the prospect of renewed price pressures.

Speaking on Thursday in remarks after her speech, Cook acknowledged that uncertainty remains elevated, but emphasised that the balance of risks is no longer evenly distributed. Instead, she flagged a growing tilt toward inflation, driven in part by the energy shock linked to the Iran war. She warned that the conflict could have a “substantial effect” on inflation dynamics, particularly through higher oil and energy costs feeding into broader price pressures.

Cook noted that the Federal Reserve had been making progress toward its 2% inflation target, but that trajectory has already been disrupted by tariffs. The latest geopolitical developments, she suggested, risk pushing inflation even further away from target, complicating the policy outlook.

Her remarks reinforce a broader shift in the Fed’s reaction function, where policymakers are becoming increasingly sensitive to upside inflation risks stemming from global supply disruptions rather than domestic demand alone. The Iran conflict, in particular, introduces a new layer of uncertainty, with energy markets highly exposed to potential supply constraints and price spikes.

This evolving backdrop is being reflected in market pricing. Expectations for Federal Reserve rate cuts have been scaled back in recent sessions, as investors reassess the likelihood of persistent inflation pressures. The combination of tariff-related price impacts and geopolitically driven energy costs has led markets to question whether the Fed will have sufficient confidence to ease policy in the near term.

In effect, Cook’s comments underscore a shift from a cautiously balanced outlook toward a more inflation-conscious stance, suggesting the Fed may need to remain restrictive for longer if these risks materialise.