Washington– There is a key question hanging over the Fed Two-day meeting Which ends on Wednesday: Will central bank policymakers continue to cut short-term interest rates this year, after the Iran war sent oil prices higher and… Gas prices rise? Or will they have to wait several months to see how the conflict develops?
Federal Reserve Chairman Jerome Powell will almost certainly announce on Wednesday that the central bank has kept its key interest rate unchanged during the period The second meeting in a row By about 3.6%. But the Fed will also issue a set of quarterly forecasts, and could change its forecast for one rate cut this year to zero. While such a change may seem small, it would represent a major course correction after 18 months of intermittent interest rate cuts.
Wherever the Fed pulls back, it’s a particularly difficult time for policymakers to issue economic forecasts. The Iran war launched by the Trump administration on February 28 has already sent gas prices higher and will drive inflation higher for at least the next month or two. The Fed will have to raise the inflation forecast it issues on Wednesday from what it was in December, when Fed officials expected inflation to fall to 2.6% by the end of this year.
Many economists expect the Fed to expect inflation to remain high at 3% even by late 2026. An increase of this size may be difficult to reconcile with further interest rate cuts.
Meanwhile, a jump in gas prices — if it is high enough and lasts long enough — could slow the economy, with more consumer spending consumed at gas stations, leaving less money to spend on other goods and services. As a result, unemployment rates may rise later this year.
On Tuesday, gas prices averaged $3.79 per gallon across the country. According to AAAan increase of 88 cents from last month.
These two outcomes – high inflation and high unemployment – ​​typically lead the Fed in opposite directions. The central bank keeps its key interest rate unchanged – or even increases it – to fight inflation, while lowering interest rates to boost spending and employment. The combination of rising prices and rising unemployment generally represents the worst-case scenario for central bankers.
Meanwhile, this week’s meeting will be among the last chaired by Powell. His term expires on May 15, and President Donald Trump has nominated a former senior Federal Reserve official. Kevin Warshto replace it. However, Warsh’s nomination was delayed in the Senate because key Republican senators objected to the Justice Department’s investigation of Powell regarding his testimony about a building renovation.
Last Friday, judge He threw out a pair of subpoenas The Justice Department issued it to the Federal Reserve, dealing a blow to the investigation. But US Attorney Jeanine Pirro said she would appeal the ruling.
This week’s meeting will be Powell’s second-to-last meeting, unless Warsh is confirmed by May 15, at which point Powell could remain chairman of the Fed’s rate-setting committee until a replacement is named.
Even before the Iran war, problems emerged in both countries Economic inflation and Jobs data, which puts the Fed in an awkward position. Prices rose more quickly in January than in recent months, according to the Fed’s preferred measure, with inflation excluding food and energy reaching 3.1% from a year earlier. This has not changed much from two years ago, which is an indication that prices are still rising at a stubbornly high pace.
However, hiring has also faltered. The government reported earlier this month that companies and other employers shed 92,000 jobs in February, an unexpectedly weak showing that came after an encouraging increase of 130,000 jobs in January. The unemployment rate rose to a low of 4.4% from 4.3%.