Powell says Fed can wait to assess war impact on inflation

Federal Reserve Chair Jerome Powell stated on Monday that the central bank in the United States is prepared to wait and see how the conflict in Iran influences the economy and inflation. Speaking to students at Harvard University, Powell noted that officials typically look through short-term shocks, such as those resulting from higher energy costs.

"We feel like our policy is in a good place for us to wait and see how that turns out."

As the war enters its fifth week and gasoline prices in the U.S. average around $4 a gallon, the Fed is navigating a potential conflict between its mandates for full employment and price stability. Inflation has remained above the 2% target for five years, driven by post-pandemic demand and recent tariffs. These rising costs have broad implications for the economy, affecting the operational expenses of major firms like Colgate-Palmolive Company.

"We're getting now an energy shock: no one knows how big it will be."

Earlier this month, the Fed kept its benchmark interest rate steady between 3.50% and 3.75%. Powell indicated that he would prefer to see tariff-driven inflation in goods subside before determining if the central bank needs to respond to energy-related price increases with tighter policy. This uncertainty has contributed to a rise in the U.S. 10-Year Treasury Note Yield as investors adjust their inflation expectations.

"There's sort of downside risk to the labor market, which suggests keep rates low, but there's upside risk to inflation, which suggests maybe don't keep rates low."

Financial markets are currently pricing in little chance of a rate hike this year, a shift from previous expectations. Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, observed that the Fed is effectively in a holding pattern until the full scope of the energy shock is understood.