Powell says Fed can ‘wait and see’ as Iran war clouds inflation outlook
Synopsis
Powell signals patience as Fed weighs inflation risks from Iran war.
Jerome Powell said the Federal Reserve can afford to wait and assess how the Iran war impacts inflation and the economy, signalling no urgency to adjust interest rates despite rising energy prices and growing uncertainty.
Key highlights
- Powell signals “wait and see” approach on inflation
- Fed sees policy in a “good place” for now
- Iran war adds uncertainty via energy prices
- Rate hike expectations fade in markets
- Inflation expectations remain anchored
Policy stance
Speaking at Harvard University, Powell said the Fed’s current policy setting allows time to evaluate how the situation evolves.
“We feel like our policy’s in a good place for us to wait and see how that turns out,” he said.
Market reaction
Powell’s comments helped calm markets, which had recently begun pricing in the possibility of rate hikes to counter inflation driven by higher oil prices.
Those expectations have now largely faded.
Dual mandate tension
Powell acknowledged the growing tension between the Fed’s goals of controlling inflation and supporting employment.
Rising oil prices pose upside risks to inflation, while potential economic slowdown creates downside risks for the labour market.
“There’s tension between the two objectives,” he said.
Inflation outlook
Despite recent shocks, Powell said longer-term inflation expectations remain stable.
“Inflation expectations do appear to be well anchored beyond the short term,” he noted.
However, he warned that the scale of the latest energy shock remains uncertain.
Rate outlook
The Fed earlier kept its benchmark interest rate unchanged at 3.50%–3.75%.
Powell reiterated that policymakers would prefer to see tariff-driven inflation ease before deciding whether to respond to war-driven price pressures.
Markets have now largely priced out rate cuts this year, compared with expectations for easing before the conflict began.
Energy shock risk
Powell described the Iran war as the latest in a series of shocks impacting inflation, following the pandemic and tariff measures.
“We’re getting now an energy shock: no one knows how big it will be,” he said.
Oil prices have surged sharply since the conflict began, adding to inflation concerns.
Economic signals
Recent data has shown mixed signals on inflation expectations.
A survey by the University of Michigan indicated a rise in short-term household inflation expectations, while market-based measures have remained more stable.
Broader remarks
Powell also addressed a range of topics, including financial markets, artificial intelligence and the Fed’s balance sheet.
He reiterated that the central bank should remain focused on its core mandate and avoid political influence.
“We’re not trying to work against any politician or any administration,” he said.
Leadership transition
Powell declined to offer specific advice to Kevin Warsh, who has been nominated by Donald Trump to succeed him when his term ends.
Warsh has indicated support for cutting interest rates.
Australia angle
For Australia, Powell’s cautious stance signals that global interest rates may remain higher for longer.
This could influence the Reserve Bank of Australia’s policy outlook, potentially delaying any rate cuts domestically.
At the same time, persistent energy-driven inflation pressures could feed into Australian prices, complicating the inflation outlook and adding pressure on households and businesses.
Now what?
The Fed will continue to monitor inflation expectations and economic data before making any policy moves.
Markets will closely track developments in oil prices and the Iran war to gauge the potential scale of the energy shock.
FAQs
Q1: What did Powell say about interest rates?
He said the Fed can wait and assess the impact of the Iran war before making changes.
Q2: Why is the Fed cautious?
Because of uncertainty around inflation and economic growth.
Q3: Are rate hikes expected?
Markets have largely ruled out immediate rate hikes.
Q4: What is the biggest risk right now?
An energy-driven inflation shock from rising oil prices.
Q5: Why does this matter for Australia?
Global rate trends influence the RBA’s policy decisions and inflation outlook.
Follow Inspirepreneur Magazine for the business news.
I write about markets, money, and the macro forces that move them. Passionate about turning complex economic trends into sharp, easy-to-understand stories. Off the clock, it’s hip hop, rock, reggae -- and a mix of cricket and basketball.
You Might Also Like
Australia Invests $10 Million to Tackle Bullying Crisis in Schools
Horse Powertrain Eyes India Expansion to Tap Small Car Demand
