MNI FED WATCH: Tariffs, Energy Inflation Stall Rate Cuts

The Iran war has thrown another wrench into the Federal Reserve’s plans to continue lowering interest rates this year, already up in the air due to tariff-driven goods inflation, Fed Chair Jerome Powell indicated during his press conference Wednesday.

Powell said he still expects inflation to moderate over the course of the year as the upward pressure on goods and energy prices fades. But he conceded that the conflict in Iran and the related spike in oil prices and supply disruptions raise new questions about the outlook. The FOMC revised higher its projection for core PCE inflation at year end to 2.7% from 2.5%. 

“There was a meaningful amount of movement toward fewer cuts by people,” Powell said of the Summary of Economic Projections, which again showed a median view of just one cut this year. "Four or five people went from two to one." 

“The thing that is really important that we see this year is progress on inflation through a reduction in goods inflation as the one-time effects on prices of tariffs go through the system and the economy," he said. "The question of whether we look through the energy inflation doesn't arise until we have checked that box.”

EXPECTATIONS KEY

Another major consideration for Fed officials on whether to look through the energy shock is that inflation has already been above target for five years. 

“It is kind of standard line that you look through energy shocks, but that's always been dependent on inflation expectations remaining well anchored, and I think now it's also dependent on … that broader context of five years now inflation above target. We have to keep all those things in mind,” Powell said. (See MNI INTERVIEW: Fed On Pause Amid Two-Sided Risks-Rosengren)

He said monetary policy is close to neutral but probably mildly restrictive, which leaves it well-positioned to address possible upside inflation risks as well as downside threats to employment. 

Powell said there “are a number of indicators that suggest a degree of stability” in jobs. He added that some on the committee are worried about weak employment growth but added this needs to be looked at in the context of immigration policies that have deliberately shrunk the labor force. 

The possibility of raising interest rates was broached at the meeting but is not any FOMC members’ base case, Powell said. The SEP showed seven members want to hold rates this year, seven see one cut, and the remaining five want two or more reductions. 

"The implication of the events in the Middle East for the U.S. economy are uncertain. In the near term, higher energy prices will push up overall inflation. It is too soon to know the scope and duration of the potential effects on the economy," Powell said. (See MNI POLICY: Fed Embraces Pause As Job Risks Abate)

STAYING ON THE JOB

Powell said he is prepared to stay on the job until his chosen replacement Kevin Warsh is confirmed by the Senate, and is ready to remain a Fed governor until the end of the Justice Department investigation of him.

"If my successor is not confirmed by the end of my term as chair, I would serve as chair pro tempore until he is confirmed. That is what the law calls for," Powell told reporters after an FOMC meeting concluded. (See: MNI INTERVIEW: Warsh Fed Will See Room For Rate Cuts- Shelton) 

"On the question of whether I will leave while the investigation is ongoing, I have no intention of leaving the Board until the investigation is well and truly over, with transparency and finality," Powell said. 

"On the question of whether I will serve as a governor after my term ends and the investigation is over, I have not made that decision yet. I will make that decision based on what I think is best for the institution and for the people we serve."