Market Update: Powell says the global oil crisis may have only temporary economic effects – Full Analysis

Washington
 — 

The Federal Reserve on Wednesday kept interest rates unchanged, as expected, but noted the “uncertain” impact to the US economy from the US-Israeli war with Iran.

Still, Fed officials are betting that the disruptions in global energy markets will likely be short lived, with the big caveat that “we just don’t know” how everything will ultimately play out, Chair Jerome Powell said in a post-meeting news conference.

Officials telegraphed that view in two key ways: In new economic projections, they continued to pencil in one rate cut this year. Fed officials also revised higher their projections for inflation in 2026, but have that slowing sharply in the following year.

“The forecast is that we will be making progress on inflation, (but) not as much as we hoped,” Powell said. “The rate forecast is conditional on the performance of the economy, so if we don’t see that progress, then you won’t see the rate cut.”

Powell also said he may stick around long enough to see how the dust settles: If former Fed Governor Kevin Warsh, whom President Donald Trump nominated as Fed chair in January, isn’t confirmed by the time Powell’s term as chair expires in mid-May, he will remain in his role until Congress approves a new Fed leader.

Republican Sen. Thom Tillis of North Carolina is the main reason behind the hold-up. He has said he will continue to block the nomination unless the Justice Department drops its investigation of Powell. DC US Attorney Jeanine Pirro, whose office is leading the probe, signaled last week she has no intention of doing that.

Fed officials voted to leave their benchmark lending rate at a range of 3.5%-3.75% for the second consecutive meeting.

The Fed’s latest decision wasn’t unanimous, with Governor Stephen Miran casting a dissenting vote in favor of a quarter-point rate cut, marking the longest stretch of back-to-back dissents since 2013. So far, Miran has dissented on all five Fed decisions he’s been part of since becoming a monetary policymaker in September, backing lower rates than the majority wants.

The Fed last year lowered rates three times in response to a weakening labor market, though officials have said in recent public speeches that the Middle East conflict is giving them some pause as they try to gauge its potential impact on inflation. Economists widely expect inflation to go up, but the extent remains to be seen, depending largely on the breadth and duration of the Iran war.

The Fed’s latest policy statement acknowledged the conflict looming over the global economy: “The implications of developments in the Middle East for the US economy are uncertain.”

America’s rate setters remain in a difficult spot as they face the twin threats of higher inflation and a job market still on shaky footing. But for now, the Fed is expected to wait on the sidelines and see everything play out, at least through the next meeting in late April. Wall Street isn’t expecting a rate cut this year, with those chances dimming even further after inflation data this morning showed growing price pressures at the wholesale level.

Powell on the Iran war and tariffs

For months, Fed officials have argued in their public speeches that Trump’s tariffs will likely result in just a one-time increase in the price level.

Powell said his colleagues have that same view on the potential economic effects from the Iran war. But they’re not very confident that may be the case, he said.

“I wouldn’t say there is a conviction that this is going through quickly or not quickly. You have to write something down, and this is something that people wrote down,” Powell said of the projections penciling in one rate cut in 2026 and inflation falling back down to Earth in 2027.

Powell said the view that officials should see through the effects of tariffs and the oil shock is based on conventional wisdom: “It is a one-time increase in the price of a good,” he said. “People say the same thing traditionally about an energy-price spike.”

However, after the Supreme Court’s ruling striking down the bulk of Trump’s tariffs and Trump’s recently enacted 15% global tariff, it has become less clear when tariff inflation may peak. Chicago Fed President Austan Goolsbee, who is not a Fed voter this year, said the intertwining prices pressure could be a problem for Fed officials.

“We already had these big question marks,” Goolsbee told The Wall Street Journal in a March 6 interview, explaining how the oil crisis is now making it difficult to discern tariff inflation. “It does dovetail energy prices with what’s going to happen with tariffs,” he said.

The next Fed meeting, in late April, is technically Powell’s last as Fed chair, but there’s a chance he may stick around in his current role for a bit longer.

“If my successor is not confirmed by the end of my term as chair, I would serve as chair pro tem until he is confirmed. That is what the law calls for,” Powell said.

Last week, after Pirro said she will appeal a judge’s decision to quash the subpoenas her office sent to Powell, Tillis said he won’t budge 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 says she is investigating part of Powell’s testimony to Congress last year over the cost of the Fed’s ongoing renovation to its Washington, DC, headquarters.

Powell said he won’t leave the board until the investigation is resolved. He is also serving a separate, concurrent term on the Fed’s board that runs through 2028. Powell didn’t share whether he plans to stay after his term as chair ends or not.

“I will make that decision based on what I think is best for the institution and for the people we serve,” he said.

The Iran war poses a “stagflationary shock,” according to Michael Pearce, chief US economist at Oxford Economics.

That means it can both weaken growth and stoke inflation at the same time, though the US economy is far from the state it was in during the 1970s and early 1980s, when both unemployment and inflation were in the double digits. The unemployment rate in February was at a low 4.4%; and inflation, as measured by the Personal Consumption Expenditures price index, registered at 2.8% in January.

Powell told reporters as much: “I would reserve the term stagflation for a much more serious set of circumstances. That is not the situation we’re in.”

Still, the direction of travel is unsettling for central bankers, who are tasked with tackling both of those issues head on. The problem is that the Fed cannot address both at the same time, at least not successfully. Under former Fed Chair Arthur Burns during stagflation decades ago, officials hiked rates to tamp down inflation, then stopped for periods of time to stimulate the economy. It eventually became clear that stop-and-go strategy played a major role in keeping inflation entrenched.

Last year when both sides of the Fed’s mandate were under stress, Powell said officials will look to address whichever problem is in the worst state first.

“It has been five years and we had the tariff shock, the pandemic, and now we have an energy shock of some size and duration. We don’t know what that will be,” Powell said. “You worry that is the kind of thing that can cause trouble for inflation expectations.”

“We worry a lot about that,” he added.

This story has been updated with new developments.