United States: Fed should temporize in the face of the return of inflation, last meeting for Powell?

Facing the inflationary effects of the war in the Middle East, the Federal Reserve is expected to keep its rates steady this week. This pivotal meeting, potentially the last presided over by Jerome Powell, is crucial as tensions rise but the US Federal Reserve is likely to remain unchanged. Meeting on Tuesday and Wednesday, its Federal Open Market Committee (FOMC) is not expected to adjust its interest rates, currently held in a range of 3.50% to 3.75%, despite a resurgence in inflationary pressures.

“It is highly unlikely that the Fed will change its interest rates, so our focus will primarily be on any elements regarding future monetary policy movements,” emphasized Nancy Vanden Houten, an economist at Oxford Economics.

This sentiment is widely shared among the markets, as evidenced by the FedWatch tool of the CME Group, which anticipates a monetary status quo at least until the end of the year.

In the background, the war unleashed at the end of February against Iran, in coordination with Israel, is disrupting global economic balances. The closure of the Strait of Hormuz by Tehran – through which over 20% of the world’s oil passes – has led to a spike in oil prices, rising from around $65 per barrel before the crisis to nearly $95, with a peak over $110 at the beginning of April. Consequently, pump prices have skyrocketed by over 15% in March, fueling inflation that could surpass 3% annually, well above the Fed’s 2% target.

“There is a significant possibility that the statement will acknowledge that a rate hike may be necessary if inflation remains persistently above the target,” said Gregory Daco, chief economist at EY.

The ongoing war has “increased uncertainty,” observed Nancy Vanden Houten. FOMC members may now give more weight to inflation risks, at the expense of the labor market, which has been central to their concerns.

Against this backdrop, Jerome Powell’s press conference, scheduled for Wednesday at 2:30 p.m. (6:30 p.m. GMT), will be closely watched by investors.

This meeting could mark the end of a cycle: Jerome Powell’s tenure as head of the Fed is set to conclude in mid-May, before the next meeting in June.

His designated successor, Kevin Warsh, still needs confirmation by the Senate, where the presidential majority remains fragile. A single dissenting vote could be enough to block his nomination.

Until recently, Republican Senator Thom Tillis opposed it, conditioning his support on the end of the lawsuits against Jerome Powell, accused of mismanagement in the Fed’s headquarters renovation.

However, Federal Prosecutor Jeanine Pirro of Washington, appointed by Donald Trump, announced on Friday the dropping of charges, removing a major obstacle to Kevin Warsh’s confirmation.

Now it remains to be seen whether the Senate will follow suit – and if the Fed itself can continue to hold off against inflation revived by geopolitical tensions.