Key Points

  • Federal Reserve Chair Jerome Powell said Monday that stable long-term inflation expectations allow policymakers to keep borrowing costs unchanged while watching whether the Iran war raises public concerns about future price pressures.
  • Powell said the conflict's impact on the economy is unclear, adding that the central bank is well prepared to respond to signs of labor market weakness or rising price pressures. Inflation has remained above the Fed's 2% target for five years.
  • "We don't know what the economic impact will be," he said of the war. "We think our policy is in a good place to wait and see." Powell said during a moderated discussion. The Fed decided on March 18 to keep its key interest rate in the range of 3.5% to 3.75%, noting uncertainty in the economic outlook.

In-Depth Analysis

Recently, as Iran has banned most ships from passing through the Strait of Hormuz, triggering a surge in oil, natural gas, and other commodity prices, short-term inflation expectations have risen.

Global BenchmarkBrent crude oil futureshave surged about 62% since the war broke out on February 28, rising from $70 per barrel to $113 per barrel.

The University of Michigan said Friday that households' inflation expectations for the next 12 months rose to 3.8% from 3.4% in February, marking thelargest one-month increase since April 2025. The survey was conducted from February 17 to March 23.

However, long-term inflation expectations have remained stable, according to measures by the University of Michigan and the New York Fed.

According to Joanne Hsu, director of the university's consumer survey, long-term inflation expectations fell slightly by 0.1 percentage point to 3.2% in March. The survey was conducted from February 17 to March 23, well after the war began.

The New York Fed found thatthe median inflation expectation for the next 12 months fell by 0.1 percentage point in Februaryto 3%, while three-year and five-year expectations remained stable at 3%.

"Inflation expectations do seem to be well anchored beyond the short term," Powell said.

Powell said the central bank has had to adjust monetary policy to address three "supply shocks" this decade, including the pandemic, the highest U.S. tariffs since the 1930s implemented last April, and the Iran war.

"You have to carefully monitor inflation expectations because there could be a series of supply shocks, which could lead the public—businesses, price setters, households—to start expecting higher inflation in the future," Powell said. "Why wouldn't they?"

Powell acknowledged that policymakers have failed to achieve the 2% inflation target for years.

"After the pandemic, we got close to 2%, but we never really reached and stayed at 2%, so it's been a while," he said. "We are very aware of that."

Meanwhile, "energy shocks tend to come and go quickly," he said, while noting that "monetary policy has long and variable lags."

"So, by the time the effects of tight monetary policy show up, the oil price shock may have long passed, and tightening at that point would drag on the economy at an inappropriate time," he said.

Therefore, among policymakers, "there is a tendency to look through any kind of supply shock," Powell said.