Powell: Fed Rates Are in a "Good Place" to Ignore Iran-Related Oil Shocks, But Watch Inflation Expectations

On Monday, March 30, during an exchange at an economics public lecture at Harvard University, Federal Reserve Chairman Powell signaled a leaning towards maintaining the status quo, while also addressing issues such as inflation expectations, private credit, the impact of artificial intelligence (AI) on employment, and the independence of the Federal Reserve. He believes the U.S. economy faces a dilemma of slowing growth and persistent high inflation, with the Fed's interest rate policy in a wait-and-see phase, and he also defended quantitative easing (QE).

Powell believes the Fed's current monetary policy is "in a good place." He stated it is too early to assess the impact of the Iran conflict on the economy and that it is not yet time to determine the extent of the impact, suggesting a wait for the effects to unfold gradually without immediate interest rate adjustments. He also warned that if persistent supply shocks lead to a drift in public inflation expectations, the Fed will be forced to act.

Following Powell's remarks, the three major U.S. stock indices maintained their rebound, and U.S. Treasury prices continued to rise, with two-year and ten-year Treasury yields falling by about 10 basis points during the day. Commentators suggested that Powell's speech eased market concerns about the Fed raising rates to counter oil price shocks.

Journalist Nick Timiraos, known as the "Fed Whisperer," titled his report on Powell's speech "Powell Says Fed Can Ignore Oil Price Shocks, But Warns Patience Has Limits." He pointed out at the beginning of the report that Powell stated energy supply disruptions are often short-lived, while also warning that given inflation has been high for several consecutive years, the Fed cannot take this for granted.

In Timiraos's view, the core of Powell's speech can be summarized in three points: ignore energy shocks in the short term, maintain a wait-and-see approach on interest rate policy, but tolerance for uncontrolled inflation expectations is decreasing. According to his interpretation, this seemingly casual classroom Q&A is essentially a typical "forward guidance": against the backdrop of geopolitical conflicts, oil price shocks, and sticky inflation, the Fed is paving the way for "staying put for longer" or even "re-tightening if necessary."

This speech occurred at a sensitive time for the Fed Chair, as Powell's term is set to expire on May 15th, his nominated successor Worsh has not yet been confirmed by the Senate, and the Trump administration's investigation into Powell himself remains unresolved.

Monetary Policy: Wait and See, But Patience is Limited

Powell provided his clearest statement to date on the current monetary policy stance. He stated that energy price shocks are often short-lived, and the transmission mechanism of monetary policy is too slow to effectively counteract supply-side price pressures in real-time. He said:

"By the time the effects of tighter policy are felt, the oil price shock may have already dissipated."

"The usual practice is to 'ignore' any type of supply shock, but a crucial prerequisite for this is to closely monitor inflation expectations."

According to Timiraos, the key takeaway from Powell's speech is that the Fed favors a wait-and-see approach to oil price shocks. However, given that U.S. inflation has persistently exceeded the Fed's 2% target for five years, this patience has a clear upper limit.

Powell posed a rhetorical question: "You can have a series of supply shocks that cause businesses, price-setters, and households to start expecting inflation to run higher for longer—why wouldn't they?"

He clearly stated during his remarks that the Fed is not lacking policy choices, but rather lacks sufficient information.

"We may end up facing the question of whether we need to take action, but we're not truly at that point yet because we don't know what the economic effects will be."

The Fed's decision at its meeting nearly two weeks ago was to maintain the federal funds rate range of 3.5% to 3.75%. Among the 12 FOMC voting members, including Powell, only Stephen Miran, a Fed governor nominated by Trump last year, dissented, supporting a 25-basis-point rate cut, as he did at the previous January meeting.

Inflation Expectations Remain Stable, But Vigilance Against Long-Term Drift

Powell stated that inflation expectations beyond the 2% target appear "well-anchored outside the short run," but the Fed is closely monitoring them. He reiterated that the FOMC is committed to bringing inflation persistently back down to 2%.

Powell acknowledged that inflation will remain above the target level for some period – the current inflation rate is around 3%, with tariffs contributing about half to one percentage point. He also stated that the impact of tariffs on inflation is a one-off shock and that there is no indication that the Fed's previous bond purchases have themselves caused inflation.

Powell explicitly supported QE in his remarks, saying, "There's a vast amount of research on this, and the general consensus is that buying long-term assets does lower interest rates and provide some support for economic activity." He also mentioned that the U.S. Treasury Department has not asked the Fed to stop QE.

Closely Monitoring Private Credit, No Systemic Risk Yet

Regarding recent turmoil in the private credit market – with some investors demanding early redemptions and some funds restricting redemptions – Powell stated that the Fed is monitoring this market "very closely," but current judgment is that it is a correction, not a broader systemic event. He said:

"I would be reluctant to say anything that suggests we are complacent about this risk, but we are looking for connections to the banking system and factors that could lead to contagion, and we're not seeing that. We are seeing a correction that is underway, and it does not appear to have the characteristics of an event that would become a broader systemic event."

Powell stated that his biggest financial stability concern is not private credit but cybersecurity. He warned that a successful cyberattack on a major financial institution would be a crisis unlike any the financial system has ever experienced, and the only risk he cannot fully model in advance.

Employment and AI: Structural Transformation is Inevitable

Powell told Harvard students frankly that the impact of AI on the job market will be profound and irreversible. He stated that large U.S. corporations are already planning to cut a large number of back-office and middle-management positions through automation, and competitive pressure will make this trend unavoidable.

"Large language models can replace a lot of jobs that are automatable, and they can, and they will."

However, Powell also offered an optimistic signal to the students, stating that workers who can effectively use AI will largely be unaffected. He himself uses AI tools to accelerate his understanding of issues. He likened the current moment to the invention of the power loom: painful for the displaced weavers, but ultimately driving productivity gains and improved living standards.

Powell also admitted that the current labor market is difficult for young people, but he remains optimistic about the future. He said that the U.S. economy remains dynamic and should provide sufficient opportunities for young people.

Successor and Fed Independence

Powell was cautious regarding the succession issue. When asked about his view on Worsh pursuing rate cuts in the current environment after taking office, he explicitly declined to comment.

However, Powell subsequently offered an implicit recommendation to the next Fed Chair:

"It's very, very important to stick to the mandate, to stick to the mission that you're actually given. There's always temptation to expand into other areas. Our tools are powerful, and they should be used for maximum employment, price stability, and financial stability. At any point in time, there will always be administrations that want to use those tools for other purposes... We have to avoid that circumstance."

Powell stated that there is broad consensus among the public and Congress regarding the Fed's independence and highly praised the Fed's staff and their ability to adhere to its core mission.

Background: Term Ending, Investigation Pending

This Harvard speech took place at a time of high pressure for both Powell personally and the Federal Reserve.

In January, the Justice Department launched a criminal investigation into Powell concerning his testimony to the Senate Banking Committee in June of the previous year regarding cost overruns on renovations to the Fed's headquarters. Powell refuted this, stating the investigation was unrelated to construction costs and was actually a means for the Trump administration to pressure him into cutting rates.

Earlier this month, a prosecutor admitted in court that no evidence of wrongdoing was found, and a federal judge immediately dismissed the subpoena. The prosecutor who initiated the case against Powell, Jeanine Pirro, subsequently held a press conference, calling the ruling "legally unfounded" and stating the Justice Department would appeal to ensure the investigation continues.

Powell's term is officially set to expire on May 15th. He stated earlier this month that if his successor has not been confirmed by the Senate by then, he will remain in his post as "interim chair." He also said he would not leave his position on the Board of Governors, which extends to January 2028, until the Justice Department investigation is fully concluded.

Senator Thom Tillis, a key Republican senator on the Senate Banking Committee and one of the deciding votes on Worsh's nomination, has stated he will block Worsh's nomination from being confirmed until the legal proceedings concerning Powell are resolved, making a smooth transition for the Fed Chair before May increasingly unlikely.