Federal Reserve Chair Jerome Powell has signaled that the central bank will not rush to adjust monetary policy in response to rising energy prices driven by Middle East tensions. Speaking to students at Harvard, Powell stated that the Fed's current policy stance is appropriate to monitor the situation, emphasizing that raising interest rates to counter a supply-driven oil shock could be counterproductive.
Powell specifically addressed the impact of geopolitical events, stating, "We're facing events in the Middle East which will certainly affect gas prices, and we feel like our policy's in a good place for us to wait and see how that turns out." He explained that energy shocks typically pass and do not warrant an immediate monetary policy response.
However, Powell issued a significant warning regarding inflation psychology. He expressed concern that a series of supply shocks could lead the public to expect higher inflation persistently. "You can have a series of these supply shocks and that can lead the public generally to start expecting higher inflation over time. Why wouldn't they?" Powell said. He clarified that if businesses and households begin to anchor their expectations to rising prices, the Fed would be forced to intervene, even in a weak growth environment, though he did not specify what action would be taken.
The backdrop to these comments includes disrupted oil shipping through the critical Strait of Hormuz, attributed to U.S. and Israeli military actions involving Iran. This has contributed to a rally in oil prices. Despite this, the Fed's most recent meeting on March 18 resulted in an 11-to-1 vote to maintain the benchmark interest rate between 3.5% and 3.75%, with only Stephen Miran dissenting in favor of a cut. Powell has pushed back against forecasts for rate cuts later in the year, noting that such projections depend on inflation slowing—a trend that has not materialized since last summer.
In related market developments, former President Donald Trump signaled a potential openness to de-escalate the Iran conflict, leading to a pullback in oil prices. West Texas Intermediate crude for May fell 0.72% to $102.14 a barrel, while Brent crude dropped 1% to $111.55.
Powell's term as Chair is set to end on May 15, with Kevin Warsh nominated as his successor. However, Senator Thom Tillis has vowed to block the confirmation process until a Justice Department investigation into Powell is completed. Powell has stated he will remain as chair pro tempore if no successor is confirmed and will stay on the Fed's board until the investigation concludes.
