March 24 (Reuters) - The U.S. Federal Reserve needs to see progress on inflation coming down to be realistic on cutting interest rates this year, but near-term prospects are not good because of higher energy prices arising from the war in Iran, Federal Reserve Bank of Chicago President Austan Goolsbee said on Tuesday.
"There's an unfortunate aspect of this shock to energy prices that we're likely to see an impact driving up inflation at a time when we still haven't quite cleared the previous shock that was
driving up inflation," Goolsbee told PBS News Hour.
"For it to be realistic that rates would come down further this year we've got to see progress on inflation," Goolsbee said. "We've got to have some comfort that we are on a path back to 2% inflation."
"With inflation going up more, we're going to have to really think through what the options are and how we're going to get through it," he said.
Inflation by the measure the Fed uses to set its 2% target is expected to be close to 3% in the 12 months ended in February. U.S. inflation has been above target for five years now.
The Fed last week held its benchmark policy rate unchanged in a range of 3.50-3.75%, and 12 of the 19 central bank policymakers indicated it would be appropriate to lower rates by at least a quarter percentage point this year.
Since the meeting, however, a number of officials have said that outlook is clouded by uncertainty around the war in Iran, which started with U.S. and Israeli air strikes on February 28 and has provoked Iran into preventing about a fifth of the world's oil supply from flowing through the critical Strait of Hormuz.
Benchmark global oil prices have shot from about $75 a barrel in late February to around $100 as of Tuesday, and U.S. gasoline prices have climbed 33% to nearly $4 a gallon, the highest since August 2022.
Goolsbee and others on the Fed have said if oil prices remain elevated, inflation is at risk of being pushed higher not just through direct impacts like higher prices at the fuel pump, but through spill over effects because energy is an important and widespread industrial input cost.
Interest rate futures in the last week have erased any prospect for a rate cut this year and are now building in pricing for possible rate hikes before the year is out.
(Reporting by Dan Burns; Editing by Tom Hogue and Lincoln Feast.)
