Powell: Time for the Fed to “Wait and See”
Federal Reserve Chairman Jerome Powell said there is a tension between the central bank’s two primary mandates—price stability and achieving maximum employment—when he spoke during a focused discussion at Harvard’s Principles of Economics class in Cambridge on Monday (March 30).
Powell emphasized that the Fed remains committed to returning inflation to its 2% target on a sustained basis. He also assessed that current inflation expectations “appear anchored,” but emphasized the importance of continuing to monitor those expectations, especially when supply shocks arise.
Regarding tariffs, Powell said that “tariff inflation” tends to be a one-time price increase, with an estimated impact of around 0.5 to 1 percentage point on inflation. He added that events in the Middle East could impact gasoline prices, reinforcing the energy inflation channel that has recently been a concern for the market.
In terms of policy, Powell said the current monetary policy stance is “well-placed” to wait and see how the situation develops. He acknowledged that the Fed does not yet know the exact economic impact of the current situation, so a data-driven approach remains dominant.
Powell also touched on the issue of the central bank’s balance sheet. He said research generally shows that long-term asset purchases lower interest rates and support the economy, and he acknowledged that there is "some truth" to that view. He added that the Fed hasn't really seen the downside risks of a large balance sheet as many had previously predicted.
Beyond interest rate policy, Powell emphasized the importance of the Fed's independence. He stated that the central bank must be fully independent and non-political, while noting that regulatory aspects differ in context, particularly post-Dodd-Frank.
For markets, the key message: The Fed tends to "look through" supply shocks, but will not ignore risks if inflation expectations begin to falter—a combination that keeps the policy path sensitive to inflation data, energy, and inflation expectations in the coming weeks.
Source: Newsmaker.id
