Federal Reserve Chairman Jerome Powell said in a wide-ranging talk at Harvard University on Monday that he sees inflation expectations as grounded despite rising energy prices, so the central bank does not need to respond with higher interest rates.
As his tenure leading the central bank neared an end, Powell dodged questions about the long-term direction of interest rates or the inclinations of his nominated successor.
He said the appropriate step in the near term is to look beyond the short-term fluctuations of the energy market and focus on the Fed’s goals of stable prices and low unemployment.
“Inflation expectations beyond the short term appear to be well settled, but nevertheless, this is something that we will ultimately have to face the question of what to do here,” he said during a question-and-answer session with a moderator and students. “We’re not really facing that yet, because we don’t know what the economic impacts will be, but we’ll certainly take that broader context into account when we make that decision.”
As he has in the past, Powell said he believes the current rate target, in the range between 3.5%-3.75%, is “a good place” for the Fed to sit as it looks at current ongoing events, including the Iran war and the impact of tariffs on prices.
The comments appeared to register across financial markets that traders no longer see a significant rate hike this year. As recently as Friday morning, markets were seeing a better than 50% chance of a quarter-percentage point increase amid expectations of a Fed response to rising energy costs. However, the chances of a hike fell to 2.2% by December after Powell’s appearance.
Powell said that raising rates now could have a negative impact on the economy later. He said Fed rate moves have a slowing effect on the economy, so tightening here won’t help the inflationary effects of the Iran war.
“By the time monetary policy tightening takes effect, the oil price shock has long passed and you are putting pressure on the economy at a time when it is not appropriate. So the tendency is to see any kind of supply shock,” he said.
Market-based measures such as breakeven rates in Treasury yields indicate some fears of rising inflation. Breakevens measure the difference between Treasuries’ inflation-indexed securities. The five-year breakeven rate was recently around 2.56% and has been trending lower over the past 10 days.
Powell’s term expires in mid-May, and President Donald Trump has nominated former Gov. Kevin Wersh as the next chairman. However, Warsh’s nomination is on hold in the Senate Banking Committee as U.S. Attorney Jeanine Pirro continues her investigation into the renovations at Fed headquarters.
Although a judge dismissed the subpoena Pirro’s office issued to Powell, he has appealed the decision. While the case is being ruled on, Senator Thom Tillis, R-N.C. has vowed to block the nomination from moving forward.
For his part, Warsh has preferred lower interest rates than current levels. Asked to comment on his successor’s plans, Powell said, “I’m not going to swing at that pitch.”
Regarding private debt, Powell noted concerns about rising defaults, investor withdrawals and broader issues in the $3 trillion sector.
“I’m reluctant to say anything that suggests we’re dismissing the risk, but we are looking for connections to the banking system and things that could result in infection. We’re not seeing those right now,” he said. “What we’re seeing is a correction, and certainly people will lose money and things like that. But it doesn’t seem to cause a widespread systemic event.”
