Powell says Fed can ‘wait and see’ how war affects inflation

CAMBRIDGE, Massachusetts: Federal Reserve Chair Jerome Powell on Monday (Mar 30) said the US central bank can wait to see how the Iran war affects the economy and inflation, noting that policymakers typically look through shocks such as those from higher oil prices.

“We feel like our policy’s in a good place for us to wait and see how that turns out,” Powell said during a question-and-answer session held as part of a macroeconomics class at Harvard University.

His remarks appeared to calm financial markets that last week had reflected rising expectations the Fed may try to head off higher inflation by raising rates. Those rate hike bets have all but disappeared.

As the Iran war enters its fifth week and US gasoline prices rise to around an average of US$4 a gallon, Powell acknowledged the potential squeeze between the Fed‘s two mandates of full employment and price stability.

“There’s sort of downside risk to the labour market, which suggests keep rates low, but there’s upside risk to inflation, which suggests maybe don’t keep rates low,” Powell said. “You’ve got tension between the two objectives.”

But for now, he said, the Fed does not have to act even as policymakers watch carefully for signs of deteriorating inflation expectations that could signal a need to respond.

“Inflation expectations do appear to be well anchored beyond the short term,” Powell said.

The Fed left its overnight benchmark interest rate steady in the 3.50 per cent-3.75 per cent range earlier this month after the end of a two-day policy meeting.