Powell: Inflation Expectations to Guide Fed’s Response to Iran Conflict

Federal Reserve Chair Jerome Powell said the Fed’s next moves depend on how the Iran conflict alters inflation expectations. He made the remarks during a moderated discussion at Harvard University on Monday.

Powell’s assessment of policy timing

Powell warned that policymakers often try to look through supply shocks. He said that approach depends on whether inflation expectations stay anchored.

Monetary policy works with long and variable lags, Powell added. By the time rate tightening bites, an oil price shock may have faded.

Powell said inflation expectations will guide the Fed’s response to the Iran conflict. He stressed careful monitoring of public expectations.

Market reactions and energy risks

The war with Iran entered its fifth week as Powell spoke. President Donald Trump threatened to destroy Iran’s energy infrastructure if no deal reopens the Strait of Hormuz.

The Strait of Hormuz handles about one-fifth of global oil flows. That choke point also carries many other commodities.

Brent crude rose above $116 a barrel early Monday after the president’s comments, then pared gains. Energy-price moves lifted gasoline costs across the United States.

Broader price effects

Blockades and disruptions have pushed up prices for plastics and fertilizers. Those moves add to already elevated cost pressures.

The U.S. is now in its fifth consecutive year of above-target inflation. The Iran conflict threatens to push prices even higher.

Policy trade-offs for the Fed

Federal Reserve officials now face a complex dual problem. They must weigh a global price shock against a still-uneven U.S. labor market.

Sustained higher energy costs could slow growth and reduce hiring. That trade-off complicates decisions on interest rates.

Just over a week ago, Fed projections showed one rate cut this year. Markets now increasingly expect a rate hike if the conflict continues.

After the Fed held borrowing costs steady for a second meeting, Powell said, “we just don’t know” how events will unfold. Economists say the economic impact depends on the war’s duration and breadth.

This story is developing and will be updated. Reporting for Filmogaz.com.