The Hormuz crisis has ignited divisions within the Federal Reserve, with Kashkari warning that a rate hike is not out of the question.
2026-05-04 15:36:42
Minneapolis Federal Reserve President Neel Kashkari issued a clear warning on Sunday (May 3): a prolonged war with Iran would simultaneously drive up inflation and exacerbate the risk of economic damage, and the Fed is no longer able to provide clear forward guidance on its current interest rate policy.
Against the backdrop of high geopolitical uncertainty, the Federal Reserve is experiencing a division rarely seen in decades. Kashkari's remarks not only reflect his personal policy stance but also reveal the decision-making dilemma of the Federal Open Market Committee (FOMC) in dealing with the impact of war—when the dual risks of inflation and growth loom simultaneously, interest rate policy faces enormous costs regardless of whether it goes left or right.
Kashkari stated on CBS that the continued blockade of the Strait of Hormuz has made him "highly concerned" about the dual impact of the war with Iran on inflation and economic demand. He pointed out that due to the various risks and uncertainties brought about by the war, the Federal Reserve may even be forced to raise interest rates.
"I don't think it's appropriate to signal an imminent rate cut right now. Everyone should know that we may face a worse situation, at which point we may have to take the opposite approach," Kashkari stated bluntly on the program.
This statement comes against the backdrop of Kashkari being one of the few members to vote against the decision at the most recent FOMC meeting. As previously reported, the April 29th Federal Reserve meeting saw the largest policy disagreement since 1992, with four of the 12 voting members opposing the decision to maintain interest rates unchanged. Kashkari was one of the hawkish dissenters. The meeting ultimately kept the target range for the federal funds rate unchanged at 3.5% to 3.75%, but the number of dissenting votes was the largest in 34 years.
Kashkari is not optimistic about a return to normalcy in the short term. Even with the best-case scenario for the war, he anticipates the disruption will last for a considerable period. He revealed on the program that he had spoken with the CEO of a Minnesota-based multinational corporation a week earlier, whose supply chain spans the globe. "They estimated that even if the strait reopened today, it might take six months for the supply chain to return to near-normal."
Kashkari's warning is not an isolated voice. Disagreements within the Federal Reserve regarding the direction of interest rate policy are widening significantly, with some dissenters explicitly stating that if inflation worsens further, the possibility of raising interest rates again cannot be ruled out.
Latest data shows that inflationary pressures are indeed intensifying. According to the Federal Reserve's economic projections released in March, the median core PCE inflation forecast for 2026 has been significantly revised upwards from 2.5% to 2.7%, with overall PCE inflation also revised upwards to 2.7%. The dot plot shows that 7 of the 19 officials still expect no rate cuts throughout 2026, while the other 7 support a cumulative rate cut of 25 basis points. The Fed maintains its median path of "25 basis point rate cuts in 2026 and another 25 basis point cuts in 2027," but one official even believes that interest rates need to be raised in 2027.
Meanwhile, soaring energy prices are becoming a direct driver of inflation. According to the latest market data, Brent crude oil for June delivery touched $126.41 per barrel last week, the highest level since the outbreak of the Russia-Ukraine conflict in March 2022. Although Brent crude oil fell back to around $108.18 per barrel by May 4, it still recorded a cumulative increase for the week.
Energy research firm HFI Research points out that with the conflict continuing and no signs of a peace agreement emerging, oil prices could retest previous highs in the coming weeks and climb further to above $150, a level exceeding the peak reached during the 2008 global financial crisis. The firm warns that the global oil market is currently facing a supply gap of approximately 13 million barrels per day, representing about 10% of global demand.
In stark contrast to Kashkari's cautious stance was U.S. Treasury Secretary Scott Bessant, who expressed confidence on Fox News that energy prices would fall sharply after the war.
Bessant believes that the war and the structural changes taking place in the oil production landscape "make me very optimistic that oil prices will be far lower than before the conflict broke out, at the beginning of this year, or even at any point between 2020 and 2025 after the conflict ends."
His optimism stems primarily from two factors. First, the futures market anticipates lower energy prices later this year. Second, Iran's attempts to impose tolls on ships transiting the Strait of Hormuz have been largely ineffective, mainly because the US-imposed maritime blockade against Iran is proving highly effective.
Bessant made it clear that the United States is the "big winner" in this energy crisis because of its large-scale oil export capacity. He admitted that the only current limitation lies in the capacity for loading and transporting.
This assertion aligns closely with the latest data. According to media reports on May 4th, the United States exported over 250 million barrels of crude oil overseas in the past nine weeks, surpassing Saudi Arabia to regain its position as the world's largest crude oil exporter. Asian buyers—from Japan and South Korea to Thailand and Australia—are turning to US crude oil to fill the supply gap in the Middle East.
The surge in exports is rapidly depleting domestic inventories in the United States. Over the past four weeks, combined U.S. crude oil and refined product inventories have fallen by 52 million barrels, dropping below historical averages. Meanwhile, the average retail price of gasoline in the U.S. has exceeded $4.40 per gallon, more than $1 higher than at the outbreak of the war, while diesel prices have risen by nearly $2, indicating that energy inflationary pressures are spreading toward the November midterm elections.
Despite the sharp rise in oil prices, a research report released by Barclays analysts on May 2nd pointed out that the surge in energy prices has remained relatively under control so far. However, this situation may soon change.
Barclays analysts emphasized that further disruptions to energy supplies would cause key fuel inventories to fall to critically low levels. "Once that tipping point is reached, prices could jump further." The report also warned that geopolitical uncertainties are making the Federal Reserve's policy path more unpredictable.
In fact, the Federal Reserve itself has begun to confront the impact of the Middle East conflict on the economic outlook. In its March FOMC statement, the Fed explicitly mentioned the Middle East situation for the first time, acknowledging that "the impact of developments in the Middle East on the U.S. economy remains unclear," and emphasizing that the Committee is "closely monitoring" the risks to its dual mandate of price stability and full employment.
The strait blockade has lasted for over two months, disrupting approximately 20% of global seaborne crude oil shipments. According to the International Energy Agency, this is the largest crude oil supply disruption on record, with Brent crude briefly exceeding $120 per barrel. Asian countries heavily reliant on Middle Eastern oil have been particularly affected. Japan, which previously sourced about 90% of its crude oil and fuel from the Middle East, has now urgently shifted to large-scale purchases from the United States.
As key variables in the global energy market, the strategic choices of China and the United States will directly influence the course of the crisis. China possesses the world's largest oil reserves and could theoretically alleviate market tensions by releasing these reserves. However, research institutions generally believe that given the view that a blockade of the Strait of Hormuz is considered a "survival risk" to the Chinese economy, China is more likely to choose to continue stockpiling rather than releasing its reserves. The stability of global oil prices is increasingly dependent on the actions of these two "last buffers"—the US and China.
The disagreement between Kashkari and Bessant essentially reflects two possible scenarios in monetary policymakers' assessment of the energy shock's trajectory. Kashkari's caution stems from the long cycle of supply chain recovery and the stickiness of inflation—even if the Strait of Hormuz reopens today, the restructuring of global energy logistics will still take months to complete, meaning the transmission of high oil prices to inflation is far from over, and the Federal Reserve cannot rashly signal an interest rate cut. Bessant's optimism is based on a structural perspective: the US has used the crisis to become the world's largest oil exporter, and its energy self-sufficiency continues to strengthen, which will weaken the transmission effect of external shocks on domestic inflation in the medium to long term. Both logics have their support, but what is more pressing for the market is the short-term reality—the ongoing Hormuz blockade, high oil prices, and accelerated depletion of US inventories have put the Federal Reserve in a dilemma: "interest rate cuts may fuel inflation, while interest rate hikes may exacerbate the economic slowdown." The forward-looking guidance function of monetary policy has been rendered ineffective due to the high uncertainty of the war, which is the most alarming signal in the current global macroeconomic environment.
Question 1: Why is there such a rare and huge disagreement within the Federal Reserve regarding interest rate policy?
Answer: The disagreement stems from the dual impact of the Middle East conflict on inflation and economic growth. At the FOMC meeting on April 29, 2026, four of the 12 voting members opposed maintaining the current interest rate, marking the largest split since 1992. The opposition included dovish Governor Milan, who advocated for rate cuts, and hawkish officials represented by Kashkari, who opposed further rate cuts. The core disagreement lies in the fact that hawks worry that the Strait of Hormuz blockade is driving up energy prices, leading to an upward revision of core PCE inflation to 2.7%, necessitating maintaining high interest rates to suppress inflation; dovish officials, on the other hand, worry that the war is dragging down the economy, requiring rate cuts to support growth. Kashkari recently warned more explicitly that if the war drags on and leads to worsening inflation, "the Fed may have to take the opposite approach," namely, raising interest rates.
Question 2: What is the actual impact of a closure of the Strait of Hormuz on the global energy market?
Answer: As of May 4th, the strait blockade since the conflict began in late February has disrupted approximately 20% of global seaborne crude oil and liquefied natural gas transport. Brent crude oil for June delivery briefly touched $126.41 per barrel, the highest since March 2022. According to the International Energy Agency, this is the largest crude oil supply disruption on record. Iran's blockade of the strait has stranded ships, and the United States responded by blocking the western entrance to the Gulf of Oman. Under this two-way blockade, 31 oil tankers carrying 53 million barrels of Iranian oil are stranded, resulting in a loss of approximately $4.8 billion in Iranian oil revenue. Market analysts warn that the current supply gap is approximately 13 million barrels per day, and if the blockade continues, oil prices could exceed $150.
Question 3: What does the United States becoming the world's largest crude oil exporter mean for the domestic economy and the Federal Reserve's policies?
Answer: According to media reports on May 4th, the United States has exported over 250 million barrels of crude oil in the past nine weeks, surpassing Saudi Arabia to become the world's largest exporter. The positive aspect of this shift is that the US has benefited from exports during the energy crisis, with energy giants expected to see their annual free cash flow increase by approximately $12 billion. However, negative effects are also emerging: US crude oil and refined product inventories have decreased by 52 million barrels in the past four weeks, the average retail gasoline price has exceeded $4.40 per gallon, and diesel prices have risen by nearly $2. Inflationary pressures are being transmitted to the Federal Reserve, further complicating its policy decisions.
Question 4: How does the rise in oil prices translate into US inflation and expectations of interest rate hikes?
Answer: Energy prices are transmitted primarily through two paths: first, by directly pushing up end-consumer prices such as gasoline and heating oil. In the US, gasoline prices have surged from approximately $3.30 per gallon before the conflict to over $4.40, directly raising the CPI; second, by pushing up non-energy goods and services prices through transportation and industrial production costs. Inflationary pressures are already reflected in Federal Reserve data: the March dot plot revised the median core PCE inflation forecast upward to 2.7%. Current interest rate futures market pricing indicates a cumulative interest rate cut expectation of only 21 basis points in 2026, with the first rate cut anchored in December 2026 or January 2027. Several institutions have postponed their expectations for the first rate cut from June to September or October.
Question 5: What is the basis for Kashkari's judgment that "supply chain recovery will take six months"?
Answer: This judgment stems from a direct conversation between Kashkari and the CEO of a Minnesota-based multinational company. This company, with its global supply chain spanning multiple countries, has personally experienced the severe impact of this crisis on logistics. From the general pattern of supply chain recovery, the closure of the Strait of Hormuz not only disrupted crude oil transportation but also caused multiple impacts, including rerouting of container shipping routes, ship congestion, port operation backlogs, and soaring freight rates. Even if the strait reopens, the rescheduling of shipping schedules, the restoration of port operation capacity in various countries, and the repricing of shipping insurance will all take a considerable amount of time. Barclays analysts have also warned that once energy inventories fall to "critically low levels," the self-repairing capacity of the supply chain will be severely limited, and any additional shocks could trigger a price surge.
Against the backdrop of high geopolitical uncertainty, the Federal Reserve is experiencing a division rarely seen in decades. Kashkari's remarks not only reflect his personal policy stance but also reveal the decision-making dilemma of the Federal Open Market Committee (FOMC) in dealing with the impact of war—when the dual risks of inflation and growth loom simultaneously, interest rate policy faces enormous costs regardless of whether it goes left or right.
Kashkari: Prematurely signaling an interest rate cut could be a major mistake.
Kashkari stated on CBS that the continued blockade of the Strait of Hormuz has made him "highly concerned" about the dual impact of the war with Iran on inflation and economic demand. He pointed out that due to the various risks and uncertainties brought about by the war, the Federal Reserve may even be forced to raise interest rates.
"I don't think it's appropriate to signal an imminent rate cut right now. Everyone should know that we may face a worse situation, at which point we may have to take the opposite approach," Kashkari stated bluntly on the program.
This statement comes against the backdrop of Kashkari being one of the few members to vote against the decision at the most recent FOMC meeting. As previously reported, the April 29th Federal Reserve meeting saw the largest policy disagreement since 1992, with four of the 12 voting members opposing the decision to maintain interest rates unchanged. Kashkari was one of the hawkish dissenters. The meeting ultimately kept the target range for the federal funds rate unchanged at 3.5% to 3.75%, but the number of dissenting votes was the largest in 34 years.
Kashkari is not optimistic about a return to normalcy in the short term. Even with the best-case scenario for the war, he anticipates the disruption will last for a considerable period. He revealed on the program that he had spoken with the CEO of a Minnesota-based multinational corporation a week earlier, whose supply chain spans the globe. "They estimated that even if the strait reopened today, it might take six months for the supply chain to return to near-normal."
Divides within the FOMC have widened, and the option of raising interest rates has returned to the table.
Kashkari's warning is not an isolated voice. Disagreements within the Federal Reserve regarding the direction of interest rate policy are widening significantly, with some dissenters explicitly stating that if inflation worsens further, the possibility of raising interest rates again cannot be ruled out.
Latest data shows that inflationary pressures are indeed intensifying. According to the Federal Reserve's economic projections released in March, the median core PCE inflation forecast for 2026 has been significantly revised upwards from 2.5% to 2.7%, with overall PCE inflation also revised upwards to 2.7%. The dot plot shows that 7 of the 19 officials still expect no rate cuts throughout 2026, while the other 7 support a cumulative rate cut of 25 basis points. The Fed maintains its median path of "25 basis point rate cuts in 2026 and another 25 basis point cuts in 2027," but one official even believes that interest rates need to be raised in 2027.
Meanwhile, soaring energy prices are becoming a direct driver of inflation. According to the latest market data, Brent crude oil for June delivery touched $126.41 per barrel last week, the highest level since the outbreak of the Russia-Ukraine conflict in March 2022. Although Brent crude oil fell back to around $108.18 per barrel by May 4, it still recorded a cumulative increase for the week.
Energy research firm HFI Research points out that with the conflict continuing and no signs of a peace agreement emerging, oil prices could retest previous highs in the coming weeks and climb further to above $150, a level exceeding the peak reached during the 2008 global financial crisis. The firm warns that the global oil market is currently facing a supply gap of approximately 13 million barrels per day, representing about 10% of global demand.
Treasury Secretary Bessenter holds an optimistic view: the United States is a "big winner" in the energy crisis.
In stark contrast to Kashkari's cautious stance was U.S. Treasury Secretary Scott Bessant, who expressed confidence on Fox News that energy prices would fall sharply after the war.
Bessant believes that the war and the structural changes taking place in the oil production landscape "make me very optimistic that oil prices will be far lower than before the conflict broke out, at the beginning of this year, or even at any point between 2020 and 2025 after the conflict ends."
His optimism stems primarily from two factors. First, the futures market anticipates lower energy prices later this year. Second, Iran's attempts to impose tolls on ships transiting the Strait of Hormuz have been largely ineffective, mainly because the US-imposed maritime blockade against Iran is proving highly effective.
Bessant made it clear that the United States is the "big winner" in this energy crisis because of its large-scale oil export capacity. He admitted that the only current limitation lies in the capacity for loading and transporting.
This assertion aligns closely with the latest data. According to media reports on May 4th, the United States exported over 250 million barrels of crude oil overseas in the past nine weeks, surpassing Saudi Arabia to regain its position as the world's largest crude oil exporter. Asian buyers—from Japan and South Korea to Thailand and Australia—are turning to US crude oil to fill the supply gap in the Middle East.
The surge in exports is rapidly depleting domestic inventories in the United States. Over the past four weeks, combined U.S. crude oil and refined product inventories have fallen by 52 million barrels, dropping below historical averages. Meanwhile, the average retail price of gasoline in the U.S. has exceeded $4.40 per gallon, more than $1 higher than at the outbreak of the war, while diesel prices have risen by nearly $2, indicating that energy inflationary pressures are spreading toward the November midterm elections.
Barclays: The energy shock is not out of control yet, but the tipping point is approaching.
Despite the sharp rise in oil prices, a research report released by Barclays analysts on May 2nd pointed out that the surge in energy prices has remained relatively under control so far. However, this situation may soon change.
Barclays analysts emphasized that further disruptions to energy supplies would cause key fuel inventories to fall to critically low levels. "Once that tipping point is reached, prices could jump further." The report also warned that geopolitical uncertainties are making the Federal Reserve's policy path more unpredictable.
In fact, the Federal Reserve itself has begun to confront the impact of the Middle East conflict on the economic outlook. In its March FOMC statement, the Fed explicitly mentioned the Middle East situation for the first time, acknowledging that "the impact of developments in the Middle East on the U.S. economy remains unclear," and emphasizing that the Committee is "closely monitoring" the risks to its dual mandate of price stability and full employment.
The strait blockade has lasted for over two months, disrupting approximately 20% of global seaborne crude oil shipments. According to the International Energy Agency, this is the largest crude oil supply disruption on record, with Brent crude briefly exceeding $120 per barrel. Asian countries heavily reliant on Middle Eastern oil have been particularly affected. Japan, which previously sourced about 90% of its crude oil and fuel from the Middle East, has now urgently shifted to large-scale purchases from the United States.
As key variables in the global energy market, the strategic choices of China and the United States will directly influence the course of the crisis. China possesses the world's largest oil reserves and could theoretically alleviate market tensions by releasing these reserves. However, research institutions generally believe that given the view that a blockade of the Strait of Hormuz is considered a "survival risk" to the Chinese economy, China is more likely to choose to continue stockpiling rather than releasing its reserves. The stability of global oil prices is increasingly dependent on the actions of these two "last buffers"—the US and China.
Editor's Summary
The disagreement between Kashkari and Bessant essentially reflects two possible scenarios in monetary policymakers' assessment of the energy shock's trajectory. Kashkari's caution stems from the long cycle of supply chain recovery and the stickiness of inflation—even if the Strait of Hormuz reopens today, the restructuring of global energy logistics will still take months to complete, meaning the transmission of high oil prices to inflation is far from over, and the Federal Reserve cannot rashly signal an interest rate cut. Bessant's optimism is based on a structural perspective: the US has used the crisis to become the world's largest oil exporter, and its energy self-sufficiency continues to strengthen, which will weaken the transmission effect of external shocks on domestic inflation in the medium to long term. Both logics have their support, but what is more pressing for the market is the short-term reality—the ongoing Hormuz blockade, high oil prices, and accelerated depletion of US inventories have put the Federal Reserve in a dilemma: "interest rate cuts may fuel inflation, while interest rate hikes may exacerbate the economic slowdown." The forward-looking guidance function of monetary policy has been rendered ineffective due to the high uncertainty of the war, which is the most alarming signal in the current global macroeconomic environment.
Frequently Asked Questions
Question 1: Why is there such a rare and huge disagreement within the Federal Reserve regarding interest rate policy?
Answer: The disagreement stems from the dual impact of the Middle East conflict on inflation and economic growth. At the FOMC meeting on April 29, 2026, four of the 12 voting members opposed maintaining the current interest rate, marking the largest split since 1992. The opposition included dovish Governor Milan, who advocated for rate cuts, and hawkish officials represented by Kashkari, who opposed further rate cuts. The core disagreement lies in the fact that hawks worry that the Strait of Hormuz blockade is driving up energy prices, leading to an upward revision of core PCE inflation to 2.7%, necessitating maintaining high interest rates to suppress inflation; dovish officials, on the other hand, worry that the war is dragging down the economy, requiring rate cuts to support growth. Kashkari recently warned more explicitly that if the war drags on and leads to worsening inflation, "the Fed may have to take the opposite approach," namely, raising interest rates.
Question 2: What is the actual impact of a closure of the Strait of Hormuz on the global energy market?
Answer: As of May 4th, the strait blockade since the conflict began in late February has disrupted approximately 20% of global seaborne crude oil and liquefied natural gas transport. Brent crude oil for June delivery briefly touched $126.41 per barrel, the highest since March 2022. According to the International Energy Agency, this is the largest crude oil supply disruption on record. Iran's blockade of the strait has stranded ships, and the United States responded by blocking the western entrance to the Gulf of Oman. Under this two-way blockade, 31 oil tankers carrying 53 million barrels of Iranian oil are stranded, resulting in a loss of approximately $4.8 billion in Iranian oil revenue. Market analysts warn that the current supply gap is approximately 13 million barrels per day, and if the blockade continues, oil prices could exceed $150.
Question 3: What does the United States becoming the world's largest crude oil exporter mean for the domestic economy and the Federal Reserve's policies?
Answer: According to media reports on May 4th, the United States has exported over 250 million barrels of crude oil in the past nine weeks, surpassing Saudi Arabia to become the world's largest exporter. The positive aspect of this shift is that the US has benefited from exports during the energy crisis, with energy giants expected to see their annual free cash flow increase by approximately $12 billion. However, negative effects are also emerging: US crude oil and refined product inventories have decreased by 52 million barrels in the past four weeks, the average retail gasoline price has exceeded $4.40 per gallon, and diesel prices have risen by nearly $2. Inflationary pressures are being transmitted to the Federal Reserve, further complicating its policy decisions.
Question 4: How does the rise in oil prices translate into US inflation and expectations of interest rate hikes?
Answer: Energy prices are transmitted primarily through two paths: first, by directly pushing up end-consumer prices such as gasoline and heating oil. In the US, gasoline prices have surged from approximately $3.30 per gallon before the conflict to over $4.40, directly raising the CPI; second, by pushing up non-energy goods and services prices through transportation and industrial production costs. Inflationary pressures are already reflected in Federal Reserve data: the March dot plot revised the median core PCE inflation forecast upward to 2.7%. Current interest rate futures market pricing indicates a cumulative interest rate cut expectation of only 21 basis points in 2026, with the first rate cut anchored in December 2026 or January 2027. Several institutions have postponed their expectations for the first rate cut from June to September or October.
Question 5: What is the basis for Kashkari's judgment that "supply chain recovery will take six months"?
Answer: This judgment stems from a direct conversation between Kashkari and the CEO of a Minnesota-based multinational company. This company, with its global supply chain spanning multiple countries, has personally experienced the severe impact of this crisis on logistics. From the general pattern of supply chain recovery, the closure of the Strait of Hormuz not only disrupted crude oil transportation but also caused multiple impacts, including rerouting of container shipping routes, ship congestion, port operation backlogs, and soaring freight rates. Even if the strait reopens, the rescheduling of shipping schedules, the restoration of port operation capacity in various countries, and the repricing of shipping insurance will all take a considerable amount of time. Barclays analysts have also warned that once energy inventories fall to "critically low levels," the self-repairing capacity of the supply chain will be severely limited, and any additional shocks could trigger a price surge.
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