By Howard Schneider

Washington (Reuters) – The American Federal Reserve (Fed) is starting a two -day meeting on Tuesday on a background of military climbing in the Middle East, which rekindled fears of an increase in raw material prices even though the trade war waged by President Donald Trump arouses concerns about an inflationary push.

The American central bank is expected to maintain its reference interest rate in a range of 4.25% to 4.50% after the meeting on Wednesday, the same level as since December.

It should also reiterate its prudence and give few indications as to the trajectory of future rates in the face of the uncertain impact of the Trump administration and budgetary policy on inflation and economic activity.

President Donald Trump has repeatedly demanded immediate decline in interest rates in recent weeks, publicly attacking its president, Jerome Powell, whom he accuses of acting too slowly.

The current clashes between Israel and Iran give the Fed additional reasons to be cautious while the revival of tensions in a key region for oil supply has triggered a lively increase in crude prices – at the risk of fueling global inflation.

FED officials have largely anticipated that the White House customs rights policy would have a “stagflation” effect on the economy, simultaneously slowing growth and increasing prices. This leaves the monetary policy trajectory – lower rates or maintenance at the current levels for an extended period – at the mercy of the problem which will prove to be the most serious.

On Tuesday, retail data data in May brought out a more marked withdrawal than expected, fueling fears on consumption, the first engine of the American economy.

A stricter approach

The Fed will publish its monetary policy declaration as well as updated projections for the economy and the benchmark interest rate at 6:00 p.m. GMT on Wednesday, then the president of the Fed, Jerome Powell, will hold a press conference from 6.30 p.m. GMT.

The economic projections of the Central Bank will undoubtedly be at the center of the attention of the markets, who want to understand how the point of view of the Fed officials on the prospects has changed since the last series of projections in March, before Washington announced massive surcharges, but also before Donald Trump delays some of the most severe samples in the face of a largely negative reaction of the markets.

The Fed lowered in March its forecast for economic growth for this year and noted its inflation prospects, while leaving the median prospect of two rate reductions in a quarter point in 2025.

In May, the institution warned of increased risks again regarding inflation and unemployment.

Some analysts anticipate a stricter approach to monetary policy, taking into account the accent placed by the Central Bank on inflation control and forecasts that customs duties will cause new price increases.

“Developments in commercial policy have probably led to a significant change in Fed forecasts”, towards even slower growth and higher inflation this year than what was scheduled for March, wrote Michael Feroli, chief economist for the United States on Friday at JP Morgan.

“These stagflationist revisions do not indicate a clear direction for the revision of the ‘plots’ dot’ [graphique qui représente les prévisions des membres du FOMC concernant l’évolution des taux d’intérêt]. Despite this, we believe that the ‘dot studs’ will be revised in a slightly ‘hawkish’ direction with a single rate reduction this year, “he added.

(Written by Howard Schneider; Diana Mandia, edited by Blandine Hénault)

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