Powell sees inflation slowing, not necessarily rising due to oil scare

The chairman of the Federal Reserve Jerome Powell, in a wide speech at Harvard University, said on Monday that he sees inflation expectations established despite the rise in energy prices so the central bank does not need to respond with higher interest rates.

As his term leading the central bank draws to a close, Powell avoided questions about the long-term direction of interest rates or the trends his chosen successor has promised.

In the near term, he said the right step is to look beyond the short-term gyrations of the energy market and focus on the Fed’s goals of stable prices and low unemployment.

“Inflation expectations seem to be more stable in the short term, but still, it is something that we will end up facing the question of what to do here,” he said during a question and answer session with the director and students. “We haven’t faced it yet, because we don’t know what the economic consequences will be, but we will certainly take that broader issue into account when we make that decision.”

As he has done in the past, Powell said he believes the current target rate, which is between 3.5%-3.75%, is a “good place” for the Fed to stay as it watches the events that are playing out, including the Iran war and the rate hike.

The comments seemed to register in the financial markets, and traders no longer have a price with a high probability of an increase in the rate this year. As recently as Friday morning, markets were looking at a better than 50% chance of a quarterly percentage increase amid expectations that the Fed would respond to increased energy costs. However, the odds of a December hike fell to 2.2% after Powell’s appearance.

Powell said raising rates now could have negative effects on the economy later. He noted that the Fed rate has an ineffective effect on the economy, therefore, tightening here will not help the inflationary effect of the Iran war.

“At the time the results of tightening the monetary policy begin to work, the capture of the price of oil is likely to be long gone, and you are measuring the economy at an inappropriate time. So the tendency is to look at any kind of supply shock,” he added.

Market-based measures such as interest rates on Treasury yields show little fear of rising inflation. Breakevens measure the difference between inflation-inflation-inflation assets. The five-year interest rate was recently near 2.56% and has remained low over the past 10 days.

Powell’s term ends in mid-May, and President Donald Trump has nominated former Governor Kevin Warsh as the next chairman. However, Warsh’s nomination is being held up in the Senate Banking Committee while US Attorney Jeanine Pirro continues her investigation into the Fed’s headquarters overhaul.

Although the judge threw out Pirro’s appeal to Powell, he has appealed the decision. While the case is being judged, Sen. Thom Tillis, RN.C., has vowed to prevent further voting.

For his part, Warsh mentioned the option of lower rates than the current level. Asked to comment on his successor’s plans, Powell said, “I’m not going to jump into that position.”

Regarding private debt, Powell noted an increase in defaults, investor withdrawals and concerns about broader issues in the $3 trillion sector.

“I hesitate to say anything that shows that we ignore the risk, but we want to connect with the banking system and things that may cause infection. We do not see those now,” he said. “What we’re seeing is a fix going on, and there’s definitely going to be people losing money and things like that. But it doesn’t look like there’s any reaction to a broader system event.”