Powell: The Federal Reserve can temporarily ignore oil price shocks and is inclined to keep interest rates unchanged

Federal Reserve Chair Jerome Powell said on Monday that, against the backdrop of an energy shock triggered by the U.S.-U.S. conflict with Iran, the Fed is inclined to hold interest rates steady and to temporarily “ignore” the impact of that shock; but he also warned that if rising prices begin to change the public’s long-term expectations for inflation, the Fed may not be able to continue standing by.

Influenced by this dovish statement, the three major U.S. stock indexes jumped higher in the short term, and U.S. 2-year to 7-year Treasury yields fell by at least 10 basis points intraday. Market pricing showed that bets on Fed rate hikes had been rolled back, and instead the market began pricing in the possibility of rate cuts this year.

In remarks at a lecture on macroeconomics at Harvard University, Powell pointed out that, based on historical experience, energy shocks are usually temporary, and the central bank’s standard response is to “wait patiently for it to fade on its own.” “I think our policy is in a good place, where we can wait and see how things turn out.”

However, he emphasized that after experiencing high inflation in recent years, policymakers cannot afford to take this lightly, and officials will closely watch for signs that the public has started to expect inflation to keep rising.

“If a series of supply shocks keeps coming one after another, it could lead the public—including businesses, price setters, and households—to gradually form higher inflation expectations. Why wouldn’t they think that?” Powell said.

Analysts noted that the Fed’s dilemma right now is that energy shocks often push up prices at the same time, and they drag down economic growth by squeezing household budgets and raising business costs. This means policymakers have to weigh the trade-off between “fighting inflation” and “stabilizing growth,” and they know that the tools used to address one problem may end up worsening the other.

In dealing with this dilemma, Powell carefully avoided committing to a clear position. He said: “We may ultimately face the question of how to respond, but we are not really at that stage yet, because we don’t yet know how the economic impacts will develop.”

This appearance comes at a critical moment for the Fed and for Powell personally. His term as chair will expire on May 15, and the Senate has not yet scheduled confirmation hearings for Kevin Wosch. Wosch is a former Fed governor, and Trump nominated him in January to replace Powell.

Republican Sen. Tom Tillis from North Carolina said he would block confirmation of Wosch’s nomination until the Justice Department’s investigation of Powell is concluded.

Earlier this month, Powell said that if no successor is confirmed by that time, he would remain in office as a “acting chair,” and he also said he would not leave the Board of Governors of the Fed before the investigation is finished.

At the March 18 meeting, the Fed voted 11 to 1 to keep the federal funds rate unchanged in the 3.5% to 3.75% range. Stephen Miren, a governor appointed by Trump, was the only dissenting vote that supported a rate cut.

After the meeting, Powell “poured cold water” on the interest rate forecasts submitted by his colleagues. Those forecasts suggest the Fed might cut rates this year, but he stressed that those expectations depend heavily on one assumption—that inflation must turn back toward the Fed’s target, and since last summer, inflation has made virtually no meaningful progress on that front.

Meanwhile, a new round of energy shocks triggered by the Iran war further increased the difficulty of policymaking. The war disrupts shipping through the Strait of Hormuz and could again throw global supply chains into confusion. And before the geopolitical shock emerged, the Fed’s preferred core inflation measure had already been trending upward.

Over the past two weeks, Powell’s colleagues reinforced a signal: “the era of easy rate cuts is over.”

Instead, officials indicated that the Fed would be more likely to consider rate cuts only in two situations: either the labor market shows clear deterioration, or inflation continues to decline. But under circumstances in which energy prices could rise significantly, the latter is nearly impossible to achieve in the near term.

Overall, this shift in policy stance means that, compared with a few months ago, the threshold for the Fed to begin cutting rates has been substantially raised. It could also create challenges for Wosch, the future successor—especially given Trump’s hope that rate cuts will be pushed after he takes office.

（Source: 财联社）