Energy shock tests Fed, Powell holds course

US Federal Reserve chair Jerome Powell has indicated that the central bank will not react to the consequences of the war with Iran for the time being, opting for a ‘wait and see’ approach. According to Powell, monetary policy is currently set appropriately, with the Fed primarily monitoring energy prices and inflation expectations.

Those indicators remain under control so far, according to available data, although inflation is still above the two per cent target.

At the same time, Powell highlighted the tension between the two main objectives – price stability and full employment. Higher oil prices may push up inflation, while also increasing the risk of a weakening labour market.

Financial markets abandoned expectations of rate hikes this year after his remarks. The Fed is therefore leaving rates unchanged for now, awaiting a clearer picture of the extent of the energy shock. Powell also stressed the need for the central bank to remain independent and to focus solely on its statutory objectives.

(reuters)