Powell Says Too Soon to know Impact of Iran War

Federal Reserve chair Jerome Powell said that it is too soon to know what kind of economic impact will come from war with Iran. Speaking at an event at Harvard University, Powell told students that the Fed's rate decisions really only have a meaningful impact on demand, not supply. Powell did say that the rise in oil prices is a supply shock that could impact inflation expectations and that has to be carefully monitored. Federal Reserve Chair Jerome Powell said longer-term inflation expectations appear to be in check but that the central bank is carefully monitoring them as it assesses the effect from the US and Israel’s war against Iran.

Inflation expectations seem to be “well anchored beyond the short term,” Powell said Monday during an event at Harvard University in Cambridge, Massachusetts. He added that officials may need to respond to the impact from the conflict, but that it’s not the case yet. “We don’t know what the economic effects will be,” he said. “We do think our policy is in a good place for us to wait and see,” he added.

Oil prices have jumped significantly since the war started a month ago, which could stoke inflationary pressures while also weighing on consumer demand and economic growth. Such a scenario would pose challenges for the Fed’s policymaking, since the central bank aims to foster both maximum employment and stable inflation.

“The tendency is to look through any kind of a supply shock but a critical essential aspect of that is you have to carefully monitor inflation expectations,” Powell said. Treasuries rallied after his remarks and stocks were higher.

Fed policymakers noted heightened economic uncertainty when they held interest rates steady earlier this month for a second straight time. Following that decision, Powell emphasized the need to see more evidence inflation is moving toward their 2% goal before policymakers would consider cutting rates again.

Private Credit

In recent weeks, jitters in the private-credit space have spooked investors about the sector, leading some investors to demand early withdrawals. Some private-credit funds have also blocked investors from pulling money out.

Asked about the turmoil, Powell said “we’re watching it super carefully” and that a correction is happening in the space.

“I’m reluctant to say anything that suggests that we’re dismissive of the risk, but we’re looking for connections to the banking system and things that might you know, result in contagion.” he said. “We don’t see those right now.”

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