U.S. Financial Policy: Tense Situation in Middle East May Also Cause Economic Difficulty

Editorial

15:20 JST, June 20, 2025

In addition to U.S. President Donald Trump’s high tariff policy, growing tensions over Israel and Iran are adding further uncertainty to the outlook for the U.S. economy.

The immediate focus for the U.S. economy is on whether inflation will be reignited. The U.S. Federal Reserve Board will be tested on its ability to carefully analyze that point.

The Fed has decided to leave its policy rate unchanged at 4.25%-4.50% per year. This is the fourth consecutive meeting since the launch of Trump’s second administration that the rate has been kept unchanged. The Fed projected that it will cut the rate twice in 2025, the same as in the previous projection in March.

The economy has so far remained robust despite high tariff measures that have been taken one after another. There has been no acceleration in rising prices, and the unemployment rate also is at a low level.

However, there is no cause for optimism. This is because there is a strong view that the high tariffs will be passed on to prices over time.

Regarding the impact of high tariffs, Fed Chair Jerome Powell said at a press conference, “We do expect to see more of that over the course of the summer.” The Fed’s decision not to cut its policy rate may be due to its emphasis on deterring inflation.

A further cause for concern is the escalating fighting between Israel and Iran. There is a strong sense of caution that Iran, which is at a disadvantage, could blockade the Strait of Hormuz, a key route for transporting crude oil, in an attempt to turn the tide, causing a sharp rise in crude oil prices.

If such a situation were to occur, it would inevitably lead to a resurgence of high prices, which would also have a huge impact on the economy.

It has been pointed out that the U.S. economy is at risk of falling into stagflation, in which high prices and recession proceed simultaneously.

Stagflation is one of the most difficult issues for central banks to deal with. To control inflation, it is necessary to keep policy rates at high levels. However, they have to deal with a recession by cutting interest rates. For that reason, they find themselves caught in a dilemma.

The Fed is urged to closely examine price trends and take a flexible policy response.

Another problem is that Trump has not stopped calling for a rate cut. On June 18, he criticized Powell, who has refused to move toward a rate cut, by calling him a “stupid person.” Such pressure will only destabilize financial markets.

Meanwhile, the Bank of Japan decided on June 17 to keep its policy rate at around 0.5%, the third consecutive meeting at which it has kept the rate unchanged since raising it in January.

BOJ Gov. Kazuo Ueda has indicated that if the economy and prices shift in line with the bank’s outlook, he intends to continue raising rates.

However, in addition to tariff negotiations between Japan and the United States having run into difficulties, consumer spending appears weak as wage hikes cannot keep pace with prolonged price rises. The BOJ will need to take time to make policy decisions.

(From The Yomiuri Shimbun, June 20, 2025)