Powell: The Federal Reserve's interest rate is in a "favorable position," and can ignore Iran-related oil price shocks, but should be alert to changes in inflation expectations

Ask AI · Why Powell is taking a wait-and-see approach to the impact of oil prices?

On Monday, March 30, during an economics open class discussion at Harvard University, Federal Reserve Chair Jerome Powell sent signals leaning toward holding steady, while also weighing in on issues including inflation expectations, private credit, the impact of artificial intelligence (AI) on jobs, and the Fed’s independence. He said the U.S. economy faces a dilemma of growth slowing while inflation remains high. He added that the Fed’s interest-rate policy is in a wait-and-see phase, and he defended quantitative easing (QE).

Powell believes the Fed’s current monetary policy is “in a favorable position.” He said it is too early to judge the extent to which the Iran conflict will affect the economy. It is not yet time to determine the impact; the Fed can wait for the relevant effects to gradually become visible, without adjusting interest rates immediately. At the same time, he warned that if persistent supply shocks cause the public’s inflation expectations to drift, the Fed would have to take action.

After Powell’s remarks ended, the three major U.S. stock indexes kept rebounding, and U.S. Treasury prices continued to rise. During the trading day, yields on the two-year and ten-year Treasuries fell by about 10 basis points. Commentators said Powell’s speech eased market concerns that the Fed would raise rates in response to an oil-price shock.

Nick Timiraos, a reporter known as the “New Federal Reserve Correspondent,” titled his report on Powell’s remarks: “Powell says the Fed can ignore oil-price shocks, but warns that patience has a limit.” At the start of the report, he pointed out that Powell said interruptions in energy supply are often temporary. He also warned that, given inflation has been high for years, the Fed cannot take it for granted.

In Timiraos’s view, the core of Powell’s remarks can be summarized in three points: ignore energy shocks in the short term; keep interest-rate policy on hold; but the tolerance for runaway inflation expectations is decreasing. Based on his interpretation, this seemingly relaxed classroom Q&A is, in essence, a classic form of forward guidance: against the backdrop of geopolitical conflicts, an oil-price shock, and sticky inflation, the Fed is making policy room for a “longer period of holding steady,” and even “tightening again when necessary.”

These remarks came at a special time when the Fed chair transition is approaching. Powell’s term ends May 15. Kevin Warsh, the nominee for his successor, has not yet been confirmed by the Senate. The Trump administration’s investigations into Powell personally also remain unresolved.

Monetary policy: wait and see, but patience is limited

Powell gave the clearest statement so far regarding the Fed’s stance on current monetary policy. He said that energy-price shocks tend to be temporary, and that the transmission mechanism of monetary policy is too slow to offset supply-side price pressures in real time. He said:

“By the time the effects of a tightening policy show up, the oil-price shock may have already faded.”

“The usual approach is to ‘ignore’ any kind of supply shock, but one of the most crucial core premises is: you have to closely monitor inflation expectations.”

According to Timiraos’s report, the key takeaway from Powell’s speech is that the Fed is inclined to wait and see regarding an oil-price shock, but because U.S. inflation has remained above the Fed’s 2% target for the past five years, this patience has a clear upper limit.

Powell posed the question: “You can experience a series of supply shocks, and that would lead companies, price setters, and households to start expecting inflation to stay high for the long run—why wouldn’t they think that?”

He said explicitly in his remarks that the Fed is not facing a policy choice it hasn’t yet confronted, but rather one for which it does not yet have enough information.

“We may ultimately face a question of whether we need to take action, but we are not truly at that step yet, because we don’t know how the economic effects will play out.”

About two weeks earlier, the Fed’s policy meeting decided to keep the target range for the federal funds rate unchanged at 3.5% to 3.75%. Among the 12 voting FOMC members, including Powell, only Stephen Miran, a Fed governor nominated by Trump last year, voted against. He, as he did in the previous January meeting, again supported a 25-basis-point rate cut.

Inflation expectations still stable, but wary of drift in long-term expectations

Powell said that inflation expectations above the 2% target currently appear to be “well anchored” beyond the short term, but the Fed is monitoring them closely. He reiterated that the FOMC is committed to keeping inflation falling back to 2% continuously.

Powell acknowledged that inflation will be above target for a period of time—current inflation is around 3%, and tariffs contribute roughly half to one percentage point to that. He also said the impact of tariffs on inflation is a one-time shock, with no signs indicating that the Fed’s prior bond-purchase actions themselves have sparked inflation.

In his remarks, Powell gave clear support to QE policy, saying, “There is a wealth of research on this. Overall, it tends to suggest that purchasing long-term assets does, in fact, lower interest rates and provides some support for economic activity.” He also mentioned that, to date, the U.S. Treasury has not asked the Fed to stop QE.

Closely watch private credit; no systemic risk yet

In response to recent turmoil in the private credit market—some investors demanding early redemptions, and some funds limiting redemptions—Powell said the Fed is watching this market “very closely,” but that it currently believes this is a correction rather than a broader systemic event. He said:

“I don’t want to say anything that suggests we are taking this risk lightly, but as of now we are looking for linkages to the banking system and factors that could lead to contagion, and we have not seen those. What we are seeing is a correction that is taking place. It doesn’t appear to have the characteristics of evolving into a broader systemic event.”

Powell said his biggest financial stability concern is not private credit, but cybersecurity. He warned that once major financial institutions suffer a successful cyberattack, it would be a crisis the financial system has never experienced before—and it is the only risk he cannot sufficiently model in advance.

Jobs and AI: structural transition is unavoidable

Powell told Harvard students directly that AI’s impact on the job market will be far-reaching and irreversible. He said that major U.S. companies are already planning to cut large numbers of back-office and middle-management roles through automation, and competitive pressure will make this trend unavoidable.

“Large language models can replace a lot of jobs that can be automated. They can, and they will do so.”

However, Powell also sent an optimistic signal to the students present, saying that workers who can effectively use AI will be largely insulated from the impact. He himself is using AI tools to accelerate his understanding of problems. He compared the current moment to the invention of a loom: while it was painful for the weavers being displaced, it ultimately drove productivity gains and improved living standards.

Powell also admitted that the current labor market is more difficult for young people, but he remained optimistic about the future. He said the U.S. economy is still full of vitality and should be able to provide young people with enough opportunities.

Successor and Fed independence

On the question of the successor, Powell was quite cautious. When asked how he viewed pushing for rate cuts in the current environment after Warsh takes office, he said clearly that he would not comment on that.

But Powell then publicly offered an implicit piece of advice to the next Fed chair. He said:

“It is extremely, extremely important to stay within our responsibilities, to stay within the actual mission that has been assigned to us. There is always a temptation to expand into other domains. Our tools are powerful, and they should be used to achieve maximum employment, price stability, and financial stability. At any time, there are administrative authorities that want these tools used for other purposes… We have to avoid ending up in that kind of situation.”

Powell said there is broad public and congressional consensus on Fed independence, and there is high recognition of the Fed’s staff and their ability to stick to the core mission.

Speech backdrop: term nearing end, investigations unresolved

This Harvard speech took place at a special moment when both Powell personally and the Fed faced intense pressure.

In January this year, the Department of Justice launched a criminal investigation into Powell, involving testimony he gave last June to the Senate Banking Committee regarding alleged cost overruns in renovations at the Fed headquarters. Powell denied it, saying the investigation is unrelated to construction costs and is essentially a way for the Trump administration to pressure him into cutting rates.

Earlier this month, a prosecutor admitted in court that no evidence of wrongdoing was found, and a federal judge immediately quashed the related subpoenas. The prosecutor seeking to prosecute Powell, Jeanine Pirro, then held a press conference, saying the ruling was “not grounded in law,” and stated that the Department of Justice would appeal, to ensure the investigation continues.

Powell’s term officially ends May 15. Earlier this month, he said that if his successor has not yet been confirmed by the Senate by then, he would remain in office as “acting chair.” He also said that he would not leave before the DOJ investigation is fully concluded, with his seat on the board extending to January 2028.

One of the key Senate lawmakers who will decide on the Warsh nomination, Republican senator Thom Tillis, has said he will block confirmation of Warsh until the legal proceedings involving Powell are resolved. This makes it increasingly unlikely that the Fed chair transition will be completed smoothly before May.