Fed expected to hold rates, weigh oil shock

Investors will be looking to Federal Reserve Chair Jerome Powell this week for insight on how the US central bank is weighing a range of risks to the economy amid US-Israeli strikes on Iran.

Officials are expected to hold their benchmark interest rate steady for a second consecutive meeting in a range of 3.5% to 3.75%. But policymakers are likely having a robust discussion over the ways the war in the Middle East could put pressure on both sides of their mandate — and whether responding to the threat of slower growth could add fuel to inflation that’s been above the Fed’s target for five years running.

“Whenever you have the Fed’s dual mandate become a dueling mandate, there should be debate,” said Diane Swonk, chief economist at KPMG. “And the reality is that we don’t have the luxury of other central banks of just looking through the inflation, given that we’re five years in and the risks of it becoming more entrenched rise by the day.”

Fed officials will release their post-meeting statement at 2 p.m. Wednesday in Washington. Powell will hold a press conference 30 minutes later.

New projections

Policymakers will release fresh economic projections that could reveal how they’re interpreting recent economic data and geopolitical events. Economists surveyed by Bloomberg News expect them to pencil in two quarter-point rate cuts for this year, up from the one cut policymakers projected in December.

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Data released since the Fed’s January gathering showed inflation remained elevated even before the conflict in the Middle East caused oil prices to surge. And news on the labour market has been mixed: A strong January report was followed by a surprising drop in payrolls in February.

Officials’ forecasts for inflation, GDP and the unemployment rate could offer clues on how they expect the oil-price shock will affect the economy over the longer run.

Policy statement

The Federal Open Market Committee could mention the Iran conflict in its post-meeting statement, nodding to the uncertainty this adds to the geopolitical landscape and the US economy. Officials may also need to update their description of the labor market to reference the recent ups and downs in employment. And Fed watchers are curious to see how they will characterize inflation after recent increases in energy prices.

Minutes from the Fed’s January gathering showed several officials would have supported language acknowledging “two-sided” risks to the future path of interest rates, suggesting an openness to raising rates if inflation stays stubbornly high. Nearly half of economists surveyed by Bloomberg News expect that wording will be incorporated at this meeting, but the weak jobs data and the uncertainty related to the Iran conflict may reduce support for rate hikes.

Fed Governor Stephen Miran said on March 6 he would dissent if officials leave rates steady this week, continuing his streak of pushing for faster rate cuts at every meeting since joining the central bank in September. Governor Christopher Waller and Vice Chair for Supervision Michelle Bowman may also vote in favour of a rate reduction, having signaled concerns about a fragile labor market.

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Press conference

Powell will likely emphasize that officials need more time to see how long the conflict with Iran lasts and to assess how it might ripple through to growth and inflation. He’s also likely to highlight the elevated level of uncertainty and the Fed’s need to keep its options open.

What Bloomberg Economics Says…

“In our view, the FOMC should look through the oil shock and maintain an easing bias — as optimal monetary policy would prescribe if inflation expectations remain anchored.”

-Anna Wong and Chris G. Collins.

Reporters may also pose questions about whether Powell plans to remain at the Fed after his term as chair ends in May. President Donald Trump has nominated Kevin Warsh, a former Fed governor, to succeed Powell as chair. But his Senate confirmation is being blocked by Republican Thom Tillis of North Carolina, who has pledged not to vote to advance Warsh until a probe by the Department of Justice into the Fed is resolved.

A US judge last week blocked DOJ subpoenas served to the Fed in January in relation to renovation costs, but US Attorney Jeanine Pirro vowed to appeal. It’s unclear how much Powell will engage on the topic, having deflected such questions in recent press conferences.

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