- Key Insight: Federal Reserve Chair Jerome Powell said there is uncertainty about how the Iran war will affect the economy, but that the central bank’s monetary policy is well positioned to “wait and see” how conditions unfold.
- Expert Quote: “You have to carefully monitor inflation expectations, because a series of these supply shocks can lead the public, businesses and households to start expecting higher inflation over time.” — Fed Chair Jerome Powell
- Look ahead: Expectations are growing that the Fed’s rate-setting committee will keep monetary policy unchanged as it evaluates how the war will impact the economy and consumer sentiment.
Federal Reserve Chair Jerome Powell said inflation remains top of mind as an energy supply shock tied to the U.S.-Iran war ripples through the U.S. economy.
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Speaking at an event at Harvard University in front of a live audience, Powell said that while policymakers typically look through supply shocks, the Federal Reserve is closely monitoring how consumers are responding to rising gas prices tied to the war.
“You have to carefully monitor inflation expectations, because a series of these supply shocks can lead the public, businesses and households to start expecting higher inflation over time,” he said. “At the end of a certain number of years, inflation is now just higher, and that can happen.”
Powell said the Fed’s monetary policy is positioned to “wait and see” how economic conditions evolve, adding that short-term inflation expectations remain stable. The federal funds rate target range is
“We will eventually face the question of what to do here,” he said. “We’re not really facing it yet because we don’t know what the economic effects will be, but we’ll be mindful of that broader context when we make that decision.”
Powell reiterated that the Federal Open Market Committee is committed to bringing inflation back to its 2% target despite uncertainty surrounding the Iran conflict and tariff-driven price pressures.
“The FOMC is and will continue to be committed to getting inflation back to 2% on a sustained basis,” he said. “We had pretty much gotten there at the end of 2024, against the predictions of almost the entire economics profession. Economists were forecasting a recession. We didn’t have one.”
Powell’s commentary comes as other members of the FOMC and former Fed officials raise concerns that the war and resulting disruptions to global oil supply could push inflation higher.
Federal Reserve Gov. Lisa Cook, Gov. Michael Barr and Vice Chair Philip Jefferson
“I would argue that the inflation risk is greater right now as a result of the Iran war,” Cook said during an event at Yale University. “Certainly we haven’t seen, in five years, our inflation target being met, and this could have potentially a substantial effect on inflation.”
“There’s a lot of uncertainty, and it will depend on how long this war lasts,” Harker said, in a previous interview with American Banker. “If oil prices spike and then fall quickly, the effects on the economy should fade relatively fast. But if elevated prices persist for months, that’s a different story. Shipping and fertilizer costs would rise, putting upward pressure on inflation in the medium term.
“For now, I think the Fed is going to sit tight,” he added.