War in Iran plunges American companies into wait-and

American businesses and households, grappling with adjustments related to the Trump administration’s tariff policy, are now feeling the full force of soaring energy prices caused by the conflict in Iran, according to a report from the Federal Reserve released on Wednesday. The document notes, however, that economic activity has been progressing in most parts of the country in recent weeks, and employment remains stable.

“The conflict in the Middle East has been mentioned as a major source of uncertainty complicating decisions regarding hiring, pricing, and capital investment, with many companies taking a wait-and-see approach,” stated the Federal Reserve in its latest Beige Book. This collection of qualitative economic data from across the country helps decision-makers refine their understanding of the economic climate and guide their interest rate decisions.

“Divergent business outlooks exist amid widespread uncertainty regarding future conditions,” the report specifies. While contacts in the Boston and St. Louis districts express some optimism despite the war, a more marked pessimism prevails in other regions.

As a contact at the Kansas City Fed revealed, households with low or moderate incomes “can no longer offset the weakness of wages, tariffs, and inflation with their budget.” The Fed is expected to maintain its federal funds rate in the current range of 3.50% to 3.75% at its next monetary policy meeting on April 28 and 29, with officials also adopting a “wait-and-see” stance.

Price growth has “largely remained moderate overall,” according to the report, which is based on surveys and interviews conducted with business leaders and community organizations in the Fed’s 12 districts.

The rise in energy costs results in increased transportation expenses and higher costs for plastics and fertilizers, the report highlights, adding that “cost pressures from input increases, in addition to energy-related hikes, were also pervasive.”

“Several manufacturers and retailers have raised their prices to cover the rising cost of inputs and expenses related to previously absorbed tariffs,” reported the Cleveland Fed. “Some industrialists have imposed surcharges on inputs derived from oil impacted by the Middle East conflict.”

EROSION OF CONSUMER RESILIENCE

The information in this latest report was collected through April 6 and reflects the unstable economic climate since Iran’s closure of the Strait of Hormuz disrupted about a fifth of global oil shipments and a third of fertilizer deliveries.

The average price of gasoline in the United States has surged to over $4 per gallon, retail diesel prices have crossed the $5.60 per gallon mark, and fertilizer prices have also sharply increased.

The previous Beige Book, which indicated generally positive expectations for economic growth and a predicted slowdown in the pace of price increases, was finalized before the recent hostilities in the Middle East began on February 28.

Decision-makers and analysts had been surprised by the resilience of household consumption despite a series of economic shocks, including the post-pandemic inflationary push and last year’s tariff shock. However, the latest Beige Book shows signs of erosion.

A jeweler from Williamsburg, Virginia, told the Richmond Fed, “if they can save a dollar and get free delivery, they buy online… this is my worst year so far.”

Manufacturing businesses in the New York Fed district noted that increased uncertainty due to changes in tariff rates and the war “disrupted pricing schedules and made customers hesitant to commit to purchases.” Despite these headwinds, “some companies reported strong momentum,” nuanced the New York Fed.

INFLATION OUTLOOK

Fed officials generally claim not to consider temporary increases in raw material prices, and many expect that inflation from last year’s tariff shocks will ease later this year, allowing them to resume rate cuts.

At the same time, inflation has remained above the Fed’s 2% target for over five years. The latest data lead economists to predict a jump last month, not only in overall inflation but also in “core” inflation (excluding energy and food), which decision-makers use to assess future inflationary pressures.

Officials largely believe that the U.S. labor market is stabilizing, with the slowdown in employment growth being balanced by a contraction in the labor force amid a sharp decline in immigration.

The unemployment rate slightly decreased last month to 4.3%.

The Beige Book highlights that wage competition has remained generally “subdued,” suggesting that the labor market is not fueling inflationary pressures. Several districts also mentioned low levels of layoffs and a low turnover rate, confirming that a labor market characterized by few departures and few hires remains the norm in much of the country.

Some signs also indicate that artificial intelligence continues to reshape the employment landscape.

“A few contacts reported using generative AI tools to reduce costs and halt new hires,” indicated the San Francisco Fed.