Considering oil prices have surged in recent weeks due to the war in Iran, and recent inflation data has also run hot, investors have grown increasingly concerned about the trajectory of the Federal Reserve’s interest rate policy.
So much so that, prior to today, instead of forecasting interest rate cuts this year, the market shifted its stance to predict no interest rate changes for the foreseeable future, with a rate hike sometime in late 2027.
But Federal Reserve Chair Jerome Powell, whose term as chair ends in May, just gave investors great news, at least in the near term. While speaking to a class at Harvard University, Powell said he believes that the recent surge in oil prices, which are not factored into core inflation, has not significantly affected the Fed’s inflation outlook.
Official White House photo by Daniel Torok.
He also called the current 3.50%-3.75% range of the Fed’s benchmark federal funds rate “a good place.”
“Inflation expectations do appear to be well anchored beyond the short term, but nonetheless, it’s something we will eventually maybe face the question of what to do here,” Powell said. “We’re not really facing it yet, because we don’t know what the economic effects will be, but we’ll certainly be mindful of that broader context when we make that decision.”
Investors breathe a sigh of relief
Investors took the news well. Those betting on federal funds rate futures now see a very small chance of a hike later this year and a greater likelihood of the Fed cutting rates toward the end of 2027, though keep in mind these probabilities are constantly changing.
Powell said it is important to try to look through an oil supply shock right now because if the Fed were to hike rates in the near term, by the time they work their way through the economy, the oil shock could be in the rear view, and then tighter monetary policy could further weigh on the economy.
The Fed isn’t solely focused on inflation; it’s also focused on the labor market, which has shown signs of weakness in recent data. Economic growth also appears to be slowing.
While Powell will only be Fed chair for another six weeks or so, President Trump’s chosen successor, Kevin Warsh, who has yet to be confirmed by Congress, is expected to favor rate cuts over a hike.
In other news, Powell also commented on the state of private credit, which has been another significant market concern lately, with some worried it could trigger a more systemic event like the 2008 global financial crisis.
“I’m reluctant to say anything that suggests that we’re dismissive of the risk, but we’re looking for connections to the banking system and things that might result in contagion. We don’t see those right now,” Powell said. “What we see is a correction going on, and certainly there’ll be people losing money and things like that. But it doesn’t seem to have the makings of a broader systemic event.”
All of this is great news for investors. While conditions and perception can change on a dime, Powell’s comments indicate the Fed is very unlikely to raise rates in the near term, and that private credit shows no imminent signs of a broader crisis. Both of these concerns have weighed on the market this year.