In the face of the conflict in the Middle East, the Fed predicts persistent inflation in the United States.
A retreat of inflation in the United States seems once again out of reach for the Federal Reserve (Fed), as it monitors the ripple effects of the Middle East conflict on prices.
>> The dollar is advancing, the pound is suffering from British unemployment. >> Wall Street is bouncing back with the decline in oil prices. >> Wall Street closes higher despite geopolitical tensions.
At the end of a two-day meeting, the central bank of the world’s largest economy unsurprisingly kept its interest rates steady on March 18 – they have been between 3.50% and 3.75% since December. The changes are elsewhere: it raised its inflation forecast in the United States.
Before the conflict and the surge in energy prices, the central bank thought that price increases could be contained around 2.4% by the end of 2026. Now, based on their projections, monetary officials see little progress in the year ahead with inflation at best at 2.7%, down from 2.8% in January.
The cost of living is a persistent issue in the country. Donald Trump promised to improve the purchasing power of Americans but several of his policies (tariffs, conflict with Iran) have a tangible impact on prices. The conflict in the Middle East, and the surge in energy prices that follows, will accentuate inflation “in the short term,” observed Federal Reserve Chair Jerome Powell at a press conference.
The Fed is “very aware” that the United States has experienced inflation above the institution’s target of 2% for the past five years, he emphasized, citing “a series of shocks” (COVID-19, wars, tariffs). However, he cautioned against hasty conclusions. “No one knows” what the repercussions of the Middle East conflict will really be on the American economy and therefore monetary policy, he stated.
The head of the Federal Reserve took care to dismiss any scenario of “stagflation” for now, a mix of inflation and low growth, noted economist Diane Swonk of KPMG. Jerome Powell “doesn’t like that word” because it reminds him of “the 1970s episodes where there was double-digit unemployment and inflation,” she believes, although she judges that the United States are indeed facing a risk of a “stagflation-like” nature.
A decrease, maybe.
The Fed appeared more united than in other recent occasions. Eleven out of twelve officials voted for the status quo. Only Governor Stephen Miran, former economic advisor to Donald Trump in office since September, wanted a quarter-point rate cut. Overall, American central bankers lean towards only one easing (a quarter-point reduction in benchmark rates) this year. In detail, many of them do not envision it at all. None foresee a hike, according to the anonymous disclosure from the Fed.
The status quo also remains on the succession.
During his press conference, Mr. Powell took a few seconds to clarify his own situation. He stated that he would not leave the Fed until a procedure against him “has been properly and definitively completed in full transparency.” Mr. Powell was referring to an initiative from a prosecutor close to Donald Trump regarding the overshooting of the renovation bill for the Fed’s headquarters in Washington.
The move was interpreted, including by elected officials from the presidential camp, as an attack on the central bank’s independence. Jerome Powell’s term as chair ends in May, but he could stay longer if the nomination of his designated successor, Kevin Warsh, is blocked in the Senate.
AFP/VNA/CVN
