Fed officials say Iran war obscuring economic, monetary policy outlook

By Michael S. Derby and Howard Schneider

NEW YORK, March 20 (Reuters) - Two Federal Reserve officials said on Friday the Iran war and its impact on energy markets were clouding the outlook for the economy and monetary policy, as one policymaker laid out an outlook calling for notably more interest rate cuts than most U.S. central bank officials currently support.

"We don't know where this is going to go, but we have to sort of think maybe caution is warranted" for the Fed, given what's happening with surging energy prices, Fed Governor Christopher Waller said in a CNBC interview.

Noting that many oil price shocks usually involve a surge and then a subsequent pullback, the Fed is watching to see if prices surge and stay high, as that poses the most notable risk to drive up inflation that's already above the central bank's 2% target, he said.

If high energy prices start pushing up underlying rates of inflation, "you do have to kind of respond," Waller said. But for now, "I just want to wait and see where this goes, and if things go reasonably well and the labor market continues to be weak, I would start advocating again for cutting the policy rate later this year," he said, adding that he didn't see any need to consider raising borrowing costs, as some Fed officials are now contemplating.

In a separate interview with Fox Business Network's "Mornings with Maria" program, Fed Vice Chair for Supervision Michelle Bowman said "I'm still concerned about ... the job market" and in terms of the monetary policy outlook, "I've written three cuts in for, before the end of 2026, to hopefully support the labor market."

Bowman's decidedly dovish monetary policy outlook contrasts with that of many of her Fed colleagues.

As for the implications of the war, Bowman said she thinks "it's too early to tell what the longer-term imprint will be on the U.S. economic activity, and how we should think about that in terms of our longer-term economic forecast, and how we should think about that in terms of our (policy) meetings and any rate changes that we might make as a result of economic evolution coming forward."

(Reporting by Michael S. Derby; Editing by Chizu Nomiyama and Paul Simao)