Key Fed Official Says Interest Rate Hike Is Possible as Gas Prices Soar

A top official at the Federal Reserve has said that soaring gas prices present a new threat to the economy, warning of a possible interest rate hike if inflation remains persistently elevated.

Oil prices have surged since the U.S.-Israeli war with Iran began, sparking fears of renewed inflation and roiling the stock market, which dipped on Tuesday after President Donald Trump threatened that Iran's "whole civilization will die tonight" if Tehran doesn't accept his terms.

Cleveland Fed President Beth Hammack, a voting member of the rate-setting Federal Open Market Committee, said on Monday that her general preference is for the Fed to leave interest rates unchanged at their current level for "quite some time."

However, she told the Associated Press that higher gas prices present two-sided risks to the economy: If they slow growth, an interest rate cut might be needed; but if they ignite persistent inflation, the Fed may have to raise its benchmark rate.

“I can foresee scenarios where we would need to reduce rates ... if the labor market deteriorates significantly,” said Hammack. “Or I could see where we might need to raise rates if inflation stays persistently above our target.”

The remarks signal that some Fed officials are moving away from messaging a rate cut as the next policy move, instead warning investors and consumers that a rate increase might be just as likely when the current pause ends.

The Fed cut its benchmark overnight rate three times last year, but has left it unchanged in a range of 3.5% to 3.75% since December. Amid signs of cooling inflation, mortgage rates dipped to a three-year low of 5.89% in February, but since then have surged, reaching 6.46% last week, according to Freddie Mac.

The culprit: surging global oil prices stemming from the U.S.-Israeli war with Iran, which have sent gas prices soaring and reignited fears of runaway inflation.

As of Tuesday, the U.S. national average price for a gallon of regular gasoline stood at $4.14, up from around $2.95 before the war began, according to AAA. If the price shock endures, it could ripple throughout the economy as shipping costs soar for everyday goods.

Hammack is not alone in raising the alarm about inflation. On Monday, Chicago Fed President Austan Goolsbee, a nonvoting member of the FOMC, voiced his view that inflation is a much greater risk than rising unemployment.

In an interview with The Indicator from Planet Money podcast taped last week, Goolsbee was asked to rate inflation risk on a color scale from "everything is looking swell" green to "the house is on fire" red.

"At least orange," he replied. "Orange with ​a chance of meatballs; it hasn't been great."

Goolsbee continued: "I was optimistic that we would get back to this path to 2% inflation, ⁠but yikes, it's going from orange to red lately—we had tariffs increasing prices, that was supposed ​to go away, kind of didn't go away, and now we add another stagflationary shock on top. ... It's a troubling ​moment."

If the Fed does raise interest rates, it would likely draw furious condemnation from Trump, who has called persistently for lower interest rates.

White House says Fed should cut rates

In an interview with CNBC on Monday, White House economic ‌advisor Kevin Hassett said that increased investment in data centers and productivity gains from AI justified a rate cut from the Fed.

"If we have a supply shock like we're seeing ​because of all this ​capital spending…AI increasing productivity, it puts ‌downward, ⁠downward pressure on inflation, and that should take the pressure off the Fed. ​They should ​be ⁠able to lower rates," Hassett said.

Hassett said that Trump and his team view the recent increase in gas prices as a "temporary phenomenon."

He added that he expected the Fed to cut interest rates if Kevin Warsh, Trump's nominee to replace Fed Chair Jerome Powell, takes over.

Powell's term as chair ends in May, but Warsh's Senate confirmation timeline remains in doubt, with a key Republican senator vowing to block any Fed appointments until a federal criminal probe into Powell is resolved.

If no replacement is confirmed by the Senate when Powell's term expires, he would remain in place as temporary chair. Powell has also vowed to retain his voting seat on the FOMC at least until the probe ends, and has the option to remain as a voter until 2028.

If and when he takes office, Warsh will have but one vote on the FOMC and may struggle to sway the panel to vote for lower rates.