Federal Reserve Chairman Jerome Powell struck a tone of “strategic ambiguity” in his remarks at a Harvard University event, suggesting that policymakers are not yet ready to respond to the current supply shock caused by oil, even as risks grow on both sides of the mandate. As the war on Iran drags on, Powell acknowledged that the Fed may eventually face difficult trade-offs, but stressed that the economic impact remains uncertain.
“The tendency is to look at any kind of supply shock,” Powell said, highlighting the Fed’s fundamental approach to energy-driven inflation. At the same time, he emphasized that such an approach crucially depends on expectations remaining grounded. “Inflation expectations appear to be well established in the short term,” he noted, adding that policymakers would “watch carefully” whether this was the case.
A major limitation is the known lag in monetary policy transmission. “Monetary policy is a long-term, variable business,” Powell said, warning that by the time tighter policy takes effect, “the oil price shock will likely be long over.” This reinforces the Fed’s reluctance to react prematurely to what may prove to be a temporary rise in supply-driven inflation.
For now, Powell noted, policy is “well positioned…to wait and see.” However, the balance could shift quickly if inflation expectations start to rise or if second-round effects emerge. Until then, the Fed remains in a holding pattern, navigating supply shock risks and policy timing constraints.
