On Wednesday, the Federal Reserve kept interest rates static, matching expectations, yet they noted the “uncertain” impact Iran-U.S. conflict holds for the American economy.
Nevertheless, Fed officials anticipate that disruptions in global energy markets will likely prove temporary, with the significant caveat that “we simply do not know” how the situation will ultimately unfold, stated Chair Jerome Powell during the post-meeting press conference.
Policymakers signaled this viewpoint through two primary channels: their updated economic projections maintained the plan for a single rate cut this year. Furthermore, Fed officials raised their inflation forecasts for 2026, though this trend decelerated sharply for the following year.
“The projection is that we will make progress against inflation, (but) not as much as hoped,” Powell commented. “The rate projection relies on economic momentum, so if we don’t see that progress, there won’t be a rate cut.”
Powell also indicated he might remain in place long enough to see how matters settle: if former Fed Chair Kevin Warsh, whom President Donald Trump nominated to the Fed chair in January, is not confirmed before Powell’s term expires in mid-May, he will stay on until Congress approves a new Fed leader.
Senator Tom Tillis, a Republican from North Carolina, is the main obstacle to confirmation. He has declared he will continue to block the nomination unless the Department of Justice ceases its inquiry into Powell. Federal Prosecutor for D.C., Jannie Pirro, whose office leads the probe, suggested last week that she has no intention of doing so.
Fed officials voted to maintain their benchmark rate within the 3.5%-3.75% range for a second consecutive meeting.
The latest Fed decision was not unanimous: Governor Stephen Mierain dissented against a quarter-point rate reduction, marking the longest stretch of consecutive dissent since 2013. To date, Mierain has disagreed with all five Fed decisions he has participated in since joining the monetary policy body in September, favoring lower rates than the majority desires.
Last year, the Fed enacted three rate cuts in response to a weakening labor market, although officials in recent public remarks have mentioned the Middle East conflict is prompting reassessment as they gauge its potential effect on inflation. Economists generally foresee inflation rising, but the extent remains unknown, heavily contingent on the scope and duration of the war with Iran.
The Fed’s latest statement acknowledged the conflict overshadowing the global economy: “The implications of events in the Middle East for the U.S. economy remain uncertain.”
American rate setters are in the delicate position of confronting dual threats from inflation pressures and an unsteady labor market. However, for now, the Fed is expected to adopt a wait-and-see posture, likely until the next gathering in late April. Wall Street is not anticipating a rate cut this year, and those prospects diminished further after wholesale inflation data released this morning showed continued pricing pressure.
Powell on the Iran Conflict and Tariffs
For months, Fed officials have maintained in public statements that Trump’s tariffs would likely cause a one-off increase in the price level.
Powell stated that his colleagues hold a similar view regarding the potential economic consequences of the Iran conflict. But they are not entirely certain that this outcome will materialize, he noted.
“I wouldn’t say there is a conviction that it happens quickly or slowly. You have to put something down on paper, and that’s what people put down,” Powell remarked about the projections which foresee a single rate cut in 2026 and inflation returning to earth by 2027.
Powell pointed out that the prevailing belief that officials must observe the effects of tariffs and the oil shock is based on conventional wisdom: “It’s a one-time price jump for a commodity,” he said. This is traditionally what is said about surges in energy prices as well.
However, following the Supreme Court’s decision to strike down much of Trump’s tariffs, coupled with his recently imposed 15% global tariff, it has become less clear when tariff inflation might peak. Chicago Fed President Austan Goolsbee, who is not a voting member this year, suggested that the intertwining price pressures could pose a complication for Fed officials.
“We already had these big questions,” Goolsbee explained to The Wall Street Journal on March 6, noting that the oil crisis now muddies efforts to pinpoint tariff inflation. “It really blends energy prices with what will happen with tariffs,” he remarked.
Powell on His Future
The Fed’s upcoming meeting at the end of April is technically the last for Powell as Fed Chair, yet there is a possibility he will continue in his current role for a while longer.
“If my successor is not confirmed by the time my term as Chair expires, I will serve as Acting Chair until they are confirmed. That is what the law requires,” Powell clarified.
Last week, following Pirro’s announcement that she intended to appeal a judge’s ruling invalidating subpoenas her office issued to Powell, Tillis reiterated he would not yield on approving Warsh.
“Appealing the ruling will only delay the confirmation of Kevin Warsh as the next Fed Chair,” Tillis said in a statement.
Pirro claims she is investigating a portion of Powell’s testimony before Congress last year regarding the cost of the ongoing renovation of the Fed headquarters in Washington, D.C.
Powell has stated he will not leave the Board of Governors until that inquiry is concluded. He also holds a separate, concurrent term on the Fed’s board that runs until 2028. Powell did not disclose whether he plans to remain after his chairmanship ends.
“I will make that decision based on what I believe is best for the institution and for the people we serve,” he stated.
Powell on Stagflation Potential
The war with Iran is creating a “stagflationary shock,” according to Michael Pearce, Chief U.S. Economist at Oxford Economics.
This implies it might simultaneously dampen growth while supporting inflation, although the U.S. economy is far from the condition seen in the 1970s and early 1980s, when both unemployment and inflation were in the double digits. The unemployment rate in February stood at a low 4.4%; and inflation, as measured by the personal consumption expenditures price index, was 2.8% in January.
Powell told reporters, “I would reserve the term stagflation for far more severe circumstances. This is not the situation we are in.”
Nevertheless, the potential trajectory is a concern for central banks tasked with tackling both issues head-on. The quandary is that the Fed cannot effectively address both simultaneously, at least not successfully. Under former Fed Chair Arthur Burns during the stagflation of decades past, officials raised rates to curb inflation, then paused for periods to stimulate the economy. Ultimately, the “stop-and-go” strategy became recognized as playing a key role in making inflation persistent.
Last year, when both sides of the Fed’s mandate were under strain, Powell indicated officials would prioritize the problem in the worse state first.
“We’ve had five years now, we’ve had a tariff shock, the pandemic, and now we have an energy shock of some magnitude and duration. We don’t know what that will be,” Powell said. “Are you worried that this could create problems with inflation expectations?”
“We are very worried about that,” he added.
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