The Federal Reserve’s balancing act is getting harder.
Policymakers are widely expected to hold the benchmark interest rate steady Wednesday as signs of a weakening labor market collide with rising price pressures from the war in Iran. That leaves the Fed caught between supporting hiring and controlling inflation.
At its late-January meeting, the Fed saw the labor market as stabilizing. Since then, Labor Department data showed U.S. employers cut 92,000 jobs in February and the unemployment rate rose to 4.4%. Revisions to December and January job counts also trimmed prior gains, leaving the economy with virtually no net job growth over the past six months.
At the same time, the conflict in Iran has disrupted global energy markets and pushed gasoline and diesel prices sharply higher over the last two-and-a-half weeks. While the Fed typically treats volatile energy prices with caution, a sustained jump in diesel would raise transport costs for many goods, feeding through to broader inflation.
“It’s going to put big, upward pressure on inflation in the near term,” said Michael Pearce, chief U.S. economist at Oxford Economics. He added that higher fuel costs will also restrain consumer spending, complicating the policy outlook.
Even before the conflict, the Fed’s preferred inflation gauge showed a January inflation rate of 3.1%, well above the 2% target. In December, Fed officials projected inflation would cool to 2.5% by year-end while unemployment would stay around 4.4%. Those forecasts are now more uncertain.
Questions about Fed leadership add to the uncertainty. Jerome Powell’s term as Fed chair ends in May, and President Trump has nominated Kevin Warsh to succeed him. But the confirmation timetable is unsettled: Sen. Thom Tillis has vowed to block Warsh’s nomination until the Justice Department drops a criminal probe into the Fed.
Last week, a federal judge quashed two DOJ subpoenas directed at the Fed, calling them part of what the ruling described as an improper campaign to force Powell and colleagues to lower rates. Tillis characterized the ruling as evidence the investigation is weak, but the Justice Department has not withdrawn the probe.
If Warsh’s confirmation is delayed, Powell—who has faced repeated attacks from the president—could remain chair into the summer and may also keep a seat on the Fed’s Board of Governors through 2028. “That would be highly unusual,” Pearce said, “but then what’s also unusual is an ongoing criminal probe into a sitting Federal Reserve chair. I think he sees it as part of his mission and part of his legacy in defending the independence of the Federal Reserve from political influence.”
