Former U.S. Treasury Secretary Janet Yellen stated that the conflict involving Iran will impact the U.S. economy and inflation, thereby complicating the Federal Reserve's task, depending on how long the conflict's effects on oil markets persist.

Speaking via video at a conference in Long Beach, California on Monday, Yellen, who previously served as Fed Chair, said, "I think recent developments concerning Iran have made the Fed more inclined to adopt a wait-and-see stance. Compared to before, they are now more reluctant to cut interest rates."

Yellen pointed out that the inflation rate is currently about one percentage point above the Fed's target, with approximately 0.5 percentage points of the current 3% inflation rate attributable to tariffs implemented during the Trump administration.

Before the outbreak of the Iran conflict, the Federal Reserve believed it had addressed issues of labor market weakness, and policymakers were waiting for inflation to naturally decline.

"But now the Iran event has occurred, oil prices have risen sharply, and we do not know what will happen in the coming days," Yellen said at the TPM26 shipping conference hosted by S&P Global. "If the Strait of Hormuz remains closed for more than a few days, oil prices could stay elevated or rise further."

Inflation Risks

Yellen noted that, considering the Fed has not yet brought inflation back down to 2%, they need to be concerned that market participants might privately speculate that "the central bank did indeed lower inflation to 3%, but they are not seriously committed to bringing it down to 2%."

"If that mindset becomes dominant, they would worry about inflation becoming permanently higher, leading to more difficult policy trade-offs," Yellen said, explaining another reason the Fed might be more inclined to maintain its current stance.

Yellen stated that aside from serious risks, including the Iran conflict, "My view is that the U.S. economy is currently quite healthy, and I am optimistic about the economic outlook."

Yellen also specifically criticized actions by the Trump administration targeting the Federal Reserve. She said the president's attempt to remove Governor Lisa Cook was "incredible." While the Supreme Court has not yet ruled on the matter, Yellen suggested Trump would likely lose.

Significant Threat

Regarding the Justice Department's investigation into Fed Chair Powell concerning cost overruns for renovations, Yellen said, "The president's action is unprecedented, essentially using the Justice Department as a weapon against the Fed Chair. Criminal charges would pose a significant threat to the Fed's independence."

"I believe everyone recognizes this would be an extremely serious blow to economic policy, potentially leading to high inflation," she added.

The former Treasury Secretary indicated that "many of Trump's actions disrupting the global economy are prompting demands for a higher risk premium on U.S. Treasury debt."

Yellen said increased concerns about U.S. economic policy are also triggering "downward pressure on the dollar" and fostering a view that higher risk "needs to be compensated with greater economic returns."