Federal Reserve Chair Jerome Powell said that the U.S. economy is facing a supply shock from the disruption of Middle East oil supplies after previous shocks like the COVID-19 pandemic and tariffs pushed prices higher.
Powell spoke to an economics class at Harvard University on Monday and said that the series of supply shocks has kept inflation elevated above the central bank’s 2% long-run target despite progress in slowing the pace of price growth substantially from its 9.1% peak in 2022.
“We got pretty close to 2% by the end of ’24,” Powell said. “We were just dealing with the effect of tariffs, which have largely fallen here in the U.S. and not abroad. They’ve been less than expected because the others didn’t retaliate, and also because what was implemented was less than what had been announced.”
“We were at about 3% inflation and somewhere between 0.5 and 0.8 [percentage points] of that is from tariffs. We’ve been pretty close to 2% all this time. Now we have another supply shock coming,” Powell said.
“You know, it’s one of those times where you get a series of supply shocks: first the pandemic, then the much smaller one from tariffs, and then we’re getting now an energy shock,” he said.
Powell added that, “No one knows how big it will be, it’s way too early to know.”
Oil prices have risen above $100 a barrel, with the price of West Texas Intermediate crude oil surging above $102 a barrel on Tuesday after trading in the $60-$70 range a month ago before the outbreak of war in Iran.
Brent crude oil is also trading at around $112 a barrel and has approached $120 a barrel since the conflict began, after it traded in a similar range between $65 and $75 a barrel before the war started.
Gas prices have surged in response to the increase in oil prices, with the national average price of regular gasoline increasing over $1 per gallon in the last month – rising from an average of $2.98 last month to $3.99 as of Monday, according to AAA data. That’s an increase of about 34% in the last month.
Powell said that while it’s unclear how severe the price shock from the energy supply disruption will be, the Federal Reserve’s monetary policy is positioned to allow for a response to conditions that require policymakers to either cut or hike interest rates to support the economy or curb inflation, respectively.
“We do think our policy is in a good place for us to wait and see,” Powell said.
The market currently sees an 80% probability that the Fed’s benchmark federal funds rate will remain at its current range of 3.5% to 3.75% for the rest of this year.
