Federal Reserve policymakers began their two-day interest rate policy meeting on Tuesday, as the ongoing conflict with Iran raised fears of a global energy crisis and clouded the path to rate cuts.
The chairman of the Fed Jerome Powell and other members of the Federal Open Market Committee will vote on Wednesday, with a majority of 12 voters expected to support leaving the rate unchanged in the current range of 3.5% to 3.75%.
At least one objection is certain, with Fed Gov. Stephen Miran very willing to cut some; opposed the reduction of the points in the quarter in favor of the reduction of the large amount in each meeting since the President Donald Trump appointed him last year.
The latest meeting comes at a time of crisis in the country, with the US-Israeli war with Iran sending global oil prices soaring and raising the prospect of new inflation.
All eyes will be on Powell during a press conference after Wednesday’s vote, where he is expected to answer a number of questions about the potential impact of the war on consumer prices and the labor market in the coming months.
Some Fed policymakers have already warned that war with Iran complicates the path to future rate cuts, with Cleveland Fed President. Beth Hammack warning that the central bank’s next move could be a rate hike, if the oil shock fuels inflation too quickly.
The Fed uses high interest rates to fight inflation, and low rates to stimulate the labor market, in keeping with the central bank’s dual mandate of price stability and high employment.
After making three rate cuts last fall, the Fed put rates on hold at the January FOMC meeting. Financial markets and forecasters assess a 99% chance of no rate change at this week’s meeting, and don’t see a potential rate cut until September at the earliest.
Realtor.com®’s top economist Jake Krimmel says it is “certain” that the Fed will remain on hold at this week’s meeting, after February inflation data showed rates growing above target.
“While the war has raised energy prices, the Fed, which tends to look past its dovish stance, has also injected economic uncertainty into financial markets and raised the prospect of future supply chain shocks,” Krimmel said. “In plain English, the war has increased the likelihood that inflation will continue, which means it will be temporarily suspended on Wednesday and possibly several meetings to follow.”
Krimmel says Powell’s press conference will be a “must watch” event for markets, as the Fed chairman explains how the war has affected policymakers’ outlook over the next few months.
Although the Fed does not directly set mortgage rates, those rates move in response to market expectations about future inflation and Fed policy.
Since the start of the war in Iran on Feb. 28, mortgage rates rose sharply, rising to 6.11% last week from a three-year low of 5.98% in late February, according to Freddie Mac.
Fed officials say the Iran war is taking rates off the table for now
Minneapolis Fed PresidentNeel Kashkaria voting member of the FOMC, said this month that the Iran war could create conditions that allow for a temporary pause in rate cuts.
“Before Iran, it seemed like things were going well,” Kashkari told the Wall Street Journal about inflation. Now, he says a war in Iran could complicate that picture by bringing higher inflation on the one hand and a shock to consumer confidence on the other.
“Not being able to balance those two things probably puts a lot of weight on staying strong for a while,” he said.
Inflation as measured by the consumer price index held at 2.4% in February, a relatively low rate although still above the Fed’s 2% target.
However, the Fed’s preferred inflation measure, the main PCE indicator, showed annual growth of 3.1% last month, up from 3% in January.
That will fuel concern among “hawks” at the FOMC who are focused on keeping inflation at bay, even if it requires higher interest rates.
Chief among them is Hammack, who is deeply skeptical of the committee’s rate cuts, warning that rate relief may be a long way off.
“We may be holding out for a long time,” Hammack told The New York Times this month. “We’re in a good place from a policy perspective.”
Hammack cautioned that the Fed may need to communicate the possibility of a rate hike if inflation does not make sustained progress toward falling over the summer.
“There are two sides to the risk in prices,” Hammack said. “If we see more weakness in the labor market, it could mean we need to provide more accommodation. If we don’t see inflation up to my expectations, it could mean we need to put more restrictions on the economy.”
Trump’s nominee for Fed chairman faces a guaranteed roadblock
Powell’s term as Fed chairman expires in May, and there are growing questions about that Kevin WarshTrump’s nominee to replace him, will be able to get Senate confirmation at the time of taking office.
Warsh’s confirmation depends on the resolution of the Justice Department’s criminal investigation into Powell, which a key Republican senator says must be resolved before he can vote on any Fed appointment.
Powell revealed in January that he is under investigation by the DOJ over his Senate testimony on the renovation of the Fed’s headquarters, denouncing the investigation as a baseless scare tactic in Trump’s campaign to push for lower interest rates.
Sen. Thom Tillisthe North Carolina Republican on the Senate Banking Committee, has sharply criticized the investigation, calling it “weak and frivolous” and demanding that it be concluded publicly before he votes to advance any nominee to replace Powell.
The investigation into Powell hit a snag last week, when a US District Judge James Boasberg issued a scathing ruling blocking a jury in the matter, saying “a mountain of evidence” showed the investigation was a ploy to force Powell to vote for lower rates.
But instead of backing down and ending the investigation, the U.S. Attorney for the District of Columbia Jeanine Pirro He criticized the decision as “outrageous” and vowed to appeal the decision.
However, Tillis remains steadfast in his vow to block any Fed nominee while a criminal case is pending, calling the investigation an attack on the Fed’s independence. Warsh’s nomination will not advance to a Senate vote without Democratic support as long as Tillis continues his veto.
If Warsh is not confirmed by May 15, Powell will continue to serve as Fed chairman indefinitely, with Trump’s pressure campaign actually extending Powell’s term instead of forcing him out.
