①Fed Chair Powell stated that, against the backdrop of an energy shock triggered by a U.S.-Iran war, the Fed is inclined to keep interest rates unchanged and temporarily 'ignore' the impact of this shock; ②Powell warned that if rising prices start to alter the public’s long-term inflation expectations, the Fed may no longer be able to remain on the sidelines.
Cailian Press reported on March 30 (edited by Niu Zhanlin) that Federal Reserve Chair Powell said on Monday that, in the context of an energy shock caused by a U.S.-Israel-Iran conflict, the Federal Reserve is inclined to maintain interest rates unchanged and temporarily 'ignore' the impact of this shock. However, he also warned that if rising prices begin to alter the public's long-term inflation expectations, the Federal Reserve may not be able to remain passive.
Influenced by this dovish statement, the three major U.S. stock indexes surged in the short term, and yields on U.S. Treasury bonds from 2-year to 7-year maturities fell by at least 10 basis points during the day. Market pricing indicates that bets on Federal Reserve rate hikes have been withdrawn, with expectations now shifting towards the possibility of rate cuts later this year.
During a lecture for Harvard University's macroeconomics course, Powell noted that, based on historical experience, energy shocks are usually temporary, and the standard response from central banks is to 'patiently wait for them to subside.' 'I believe our policy is in a good position, allowing us to wait and see what happens.'
However, he emphasized that, after years of high inflation, policymakers cannot afford to be complacent. Officials will closely monitor whether there are signs that the public is beginning to expect persistently higher inflation.
'If a series of supply shocks occur consecutively, it could lead the public—including businesses, price-setters, and households—to gradually form higher inflation expectations. Why wouldn’t they think that way?' Powell remarked.
Analysts pointed out that the dilemma facing the Federal Reserve is that energy shocks often simultaneously push up prices while dragging down economic growth by squeezing household budgets and raising business costs. This forces policymakers to weigh the trade-off between 'fighting inflation' and 'stabilizing growth,' and they are aware that the tools used to address one issue may exacerbate the other.
Regarding this dilemma, Powell cautiously avoided making a definitive statement. He said, 'We may eventually face the question of how to respond, but we are not really at that stage yet because we still do not know how the economic impact will unfold.'
This appearance comes at a critical moment for both the Federal Reserve and Powell personally. His term as chairman will expire on May 15, and the Senate has yet to schedule a confirmation hearing for Kevin Warsh. Warsh, a former Federal Reserve governor, was nominated by Trump in January to succeed Powell.
Republican Senator Thom Tillis of North Carolina stated that he would block the confirmation of Warsh’s nomination until the Department of Justice investigation into Powell concludes.
Powell stated earlier this month that if no successor has been confirmed by then, he will remain in his position as "interim chair" and emphasized that he will not leave the Federal Reserve Board until the investigation concludes.
At the meeting on March 18, the Federal Reserve voted 11 to 1 to maintain the federal funds rate within the range of 3.5% to 3.75%. Stephen Moore, a governor appointed by Trump, was the sole dissenting vote in favor of a rate cut.
Following the meeting, Powell “poured cold water” on the interest rate forecasts submitted by his colleagues. These projections suggested that the Federal Reserve might consider cutting rates this year, but he stressed that these expectations are highly contingent upon one condition: inflation must return toward the Fed’s target. Since last summer, however, there has been little substantial progress on this front.
Meanwhile, a new wave of energy shocks triggered by the Iran war further complicated policy decisions. The conflict disrupted shipping through the Strait of Hormuz and could once again plunge global supply chains into chaos. Even before the geopolitical shock, the core inflation measure preferred by the Federal Reserve had already shown an upward trend.
Over the past two weeks, Powell’s colleagues have further reinforced a message: "The era of easy rate cuts is over."
On the contrary, officials indicated that the Federal Reserve would only consider rate cuts under two scenarios: either a significant deterioration in the labor market or sustained declines in inflation. However, against the backdrop of potentially sharp increases in energy prices, the latter scenario appears almost unattainable in the short term.
Overall, this shift in policy stance implies that the threshold for the Federal Reserve to initiate rate cuts has significantly increased compared to just a few months ago. This may also pose challenges for Kevin Warsh, the future successor, especially given Trump's desire for him to push for rate cuts after assuming office.
Editor/Liam