“We feel like our policy is in a good place to wait and see how that plays out,” Powell said during a question-and-answer session held as part of Harvard University’s macroeconomics class.
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His comments appeared to calm financial markets that last week showed growing expectations that the Fed could try to reduce inflation by raising rates. Those rate hikes are all gone.
As the Iran war enters its fifth week and US oil prices rise to nearly $4 a gallon, Powell acknowledged that there is a potential trade-off between the Fed’s two orders of full employment and price stability.
“There’s downside risk to the labor market, which suggests keeping rates low, but there’s downside risk to inflation, which suggests maybe not keeping rates low,” Powell said. “You have a tension between two goals.”
But for now, he said, the Fed is not expected to act as policymakers are watching closely for signs of worsening inflation expectations that could signal the need to respond.
“Inflation expectations appear to be well-established over the short term,” Powell said.
In a press conference after the meeting, Powell said he would like to see the inflation rate driven by the cost of goods decreases before he gets to the question of whether the central bank should ignore the rise in prices caused by the war, or respond to it with a strong monetary policy to prevent inflation from increasing.
Powell noted on Monday that inflation continues to be above the central bank’s target of 2% for almost five years, fueled by a series of shocks: the collision of strong demand and heavy supply as the world is opening up from the disasters of the COVID-19 pandemic, and recently what the head of the Fed called “a very small shock” to rates.
‘STICK IN WHAT WE DO’
Other measures, including the much-watched market-based measure, have been more sanguine.
Powell’s remarks were “textbook and consistent with what he has said before,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. “The Fed is pretty much on hold until we find out more about the shape and size and scope of this energy shock that’s ahead of us.”
Asked to provide advice to former Fed Governor Kevin Warsh, President Donald Trump’s nominee to succeed him as head of the central bank when Powell’s term ends on May 15, the current Fed chief flatly declined.
However, Powell suggested that the Fed should resist any temptation to use its resources for anything beyond achieving its congressionally mandated goals of keeping prices stable and increasing employment.
“We’re not trying to work against any politician or any administration, but we have to be careful to stick to what we’re doing,” said Powell, who Trump has repeatedly attacked for keeping borrowing costs too high.
Warsh has indicated that he would support lowering interest rates.
Powell noted that the student who asked the question was wearing a Boston Red Sox baseball jersey.
“It’s not something I’m going to talk about, that sound,” Powell said.
Reporting by Dan Burns, Michael S. Derby, David Lawder and Ann Saphir; Written by Ann Saphir; Organized by Lincoln Festival and Paul Simao
Our standards: The Thomson Reuters Trust Principles.
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