Former Powell Advisor: Middle East Situation May Lead to US Economic Recession, US Fed Faces "Major Variables"

Jon Faust, a former senior advisor to Fed Chairman Powell, recently stated that while it is still too early to determine how the Israel-Iran conflict will unfold, the situation in the Middle East represents a "significant uncertainty" for the US Fed and could potentially trigger a US economic recession.

Jon Faust is a monetary economist with a PhD in Economics from the University of California, Berkeley. He is currently a researcher at the Center for Financial Economics at Johns Hopkins University. He has served as an internal advisor to three Fed Chairmen: Bernanke, Yellen, and Powell, and has worked at the US Fed for nearly 20 years.

A sharp rise in oil prices could trigger an economic slowdown

. In an interview with the media, Faust said, "If this conflict leads to a significant increase in oil prices and further impacts uncertainty and confidence, it could trigger an economic slowdown".

He pointed out, "Economic recessions typically occur when consumers and businesses are hit by some major shock. We may be seeing this unfold in the Middle East, and the likelihood of this scenario has slightly increased."

Wall Street giant JPMorgan Chase warned in a report last week that under extreme geopolitical circumstances, particularly those involving Iran, oil prices could nearly double, reaching levels of $120-130 per barrel.

Key points of this week's interest rate meeting

The US Fed will hold a meeting on June 17-18 to set interest rate policies. The market widely expects the central bank to maintain interest rates unchanged for the fourth consecutive time. Since December last year, the US Fed has kept the benchmark interest rate in the range of 4.25% to 4.5%.

Faust pointed out that the key point of this week's interest rate meeting is whether Powell will further clarify whether the future risk is more likely to be an outbreak of inflation or a weakening of the labour market. "This will provide some guidance for the policy direction this year," but so far, the US Fed has not shown a clear preference for either direction.

Powell has already indicated that Trump's tariffs are highly likely to lead to an increase in US inflation or a slowdown in the labour market.

In March this year, Fed officials expected two interest rate cuts this year. Fed observers are now focusing on whether the latest dot plot, to be released this week, will show policymakers lowering their forecasts for the number of interest rate cuts.

Faust said he believes the so-called dot plot will not be very convincing. From the current perspective, the probabilities of the US Fed not cutting interest rates, cutting once, or cutting twice this year are equal.

Not cutting interest rates is good news.

US President Trump has recently increased pressure on Powell in recent days, urging him to cut interest rates promptly. In response, Faust said that while it's never good to be told by others that one's work is not up to par, these criticisms are "largely irrelevant" to the US Fed's policy path.

Faust stated that although the US CPI inflation in May was lower than expected, it did not open the door for the US Fed to accelerate its actions. He pointed out that while the data has alleviated some concerns about the "worst-case scenario" for inflation, it is still too early to judge the impact of tariffs on inflation.

He also noted that if the US Fed does not cut interest rates this year, it would be good news for everyone except the president, as it would mean that the labor market remains robust and the US economy has not weakened to the point where an interest rate cut is necessary.

He also said that there is still significant uncertainty about how tariffs will ultimately be implemented and their impact, the data may not support the US Fed taking action in September, and he predicts a 50% likelihood of an interest rate cut in December.