Powell: Inflation outlook is manageable; no need to hike rates due to oil shocks

Key Takeaways

• Federal Reserve Chair Jerome Powell said that even though energy prices have risen, inflation expectations remain solid.
• Powell said that in the short term, the right approach is to ignore the energy market’s short-term fluctuations and focus on the Fed’s goals of stable prices and low unemployment.
• The Fed chair said that the current turmoil in the private credit sector does not appear to have the conditions to evolve into a broader systemic event.

Jerome Powell, chair of the Federal Reserve, said Monday during a wide-ranging discussion at Harvard University that even though energy prices have risen, inflation expectations remain solid, so the Fed does not need to respond with rate hikes.

As his term as Fed chair is set to end, Powell avoided questions about the long-term path of interest rates and the stance favored by his designated successor.

He said that in the short term, the right approach is to ignore the energy market’s short-term fluctuations and focus on the Fed’s goals of stable prices and low unemployment.

“From a long-term perspective, inflation expectations do appear to be well anchored, but even so, we may ultimately still have to deal with the question of how to respond,” he said during the Q&A with the host and students. “We are not facing that issue right now, because we do not yet know its economic impact, but when making decisions, we will certainly take the broader context into account.”

As he has in the past, Powell believes that the current federal funds target range of 3.5%-3.75% is the “appropriate position” the Fed looks at for how events are unfolding, including the Iran war and the impact of tariffs on prices.

The remarks sparked a reaction in financial markets, with traders no longer pricing in the possibility of large rate hikes this year. As of early Friday morning, the market still expected the Fed to respond to the surge in energy costs, with the probability of a 25-basis-point hike exceeding 50%. But after Powell’s speech, the probability of a rate hike before December fell to 2.2%.

Powell said that raising rates now could have negative effects on the economy later. He noted that changes in Fed interest rates have a lagged impact on the economy, so tightening policy now would not help ease the inflation shock brought by the Iran war.

“By the time the effects of monetary policy tightening show up, the oil price shock may already be over, and you would be putting pressure on the economy at the wrong time. So we tend to ignore any type of supply shock,” he added.

Powell’s term will end in mid-May. Former President Donald Trump has nominated former Fed governor Kevin Wosch to serve as chair. However, because U.S. prosecutor Jeanina Piro is still investigating renovations at the Fed headquarters, Wosch’s nomination has been blocked in the Senate Banking Committee.

Although the judge rejected the summons issued by Piro’s office to Powell, she has filed an appeal. During the case proceedings, Republican Sen. Tom Tillis of North Carolina pledged to block the nomination from moving forward.

Wosch himself has already said he is inclined to bring interest rates below their current level. When asked about his views on the successor’s plans, Powell said, “I’m not going to take that bait.”

On private credit, Powell noted rising default rates in the sector, investors pulling back, and concerns about the broader issues for this $3 trillion industry.

“I’m not willing to say anything that suggests we’re dismissing the risks, but we are looking for links with the banking system and for factors that could lead to risk contagion. We haven’t seen those yet,” he said. “What we are seeing is that the market is adjusting, and certainly there will be some losses, things like that. But it doesn’t seem to have the conditions to evolve into a broader systemic event.”

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