Powell Says Too Soon to Judge War’s Impact as Inflation Keeps Fed on Hold

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(Bloomberg) — Federal Reserve Chair Jerome Powell made it clear the US central bank won’t cut interest rates again until inflation resumes cooling. And that’s before it even starts considering the possible impact of the war in the Middle East.

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Powell, in a press conference Wednesday, underscored that it was still too soon to gauge the effects of a surge in oil prices on the US economy, even as financial markets have raced to price in higher expected inflation over the year ahead. Instead, he dwelled on signs, even prior to the outbreak of war, that price pressures were lingering longer than policymakers had hoped.

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“The thing that’s really important that we see this year is progress on inflation,” Powell said. “If we don’t see that progress, then you won’t see the rate cut.”

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The Fed chair’s comments, delivered after a decision to leave rates unchanged for a second straight meeting, reinforced the notion that the central bank is still a long way from resuming a string of rate reductions it undertook at the end of 2025 as data on consumer prices refuse to cooperate.

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That trend also raises the specter that the Fed’s next move may ultimately be a hike, a possibility Powell acknowledged came up again in discussions this week — though that’s not the base case for the majority of policymakers, he added.

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Interest-rate markets show the probability of one rate reduction as a coin-flip, whereas just three weeks ago they were leaning toward three cuts. Yields on two-year US notes — the most sensitive to the Fed’s policy changes — rose as much as 10 basis points to nearly 3.78% on Wednesday, the highest in seven months. 

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In fresh projections released Wednesday, officials maintained their call for one rate cut this year, according to the median estimate. But they also unexpectedly revised up their projections for economic growth, suggesting they’re not yet concerned about the possible dampening effect of higher energy costs.

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Inflation Estimates Up

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Meanwhile their inflation estimates moved up, which Powell mainly attributed to the lingering impact of tariffs. He noted price pressures have been particularly stubborn in the goods categories most impacted by the levies.

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“The question of whether we look through the energy inflation doesn’t really arise until we have checked that box,” Powell said.

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The Fed chief also expressed optimism about the outlook for the labor market, even as low hiring has raised concerns that it could be on the brink of more significant pain. He pointed to the unemployment rate, which has been little changed since September.

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Worries over employment drove the Fed to cut rates by three-quarters of a percentage point at the end of 2025. Most policymakers now see rates as near the level where they’re neither weighing on nor stimulating growth, which Powell said was “the right place to be” now.

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“The market has been concerned about the growth risk as well as the inflation risk from the oil price shock,” said Priya Misra, a portfolio manager at JPMorgan Asset Management. “It seems that the Fed might be more concerned about the inflation risk, and that just could be a function of the fact that the inflation numbers are further away from their target than the unemployment rate.”