Dive Brief:

• Federal Reserve Chair Jerome Powell said Monday that stable long-term inflation expectations enable policymakers to hold borrowing costs steady as they look for any sign that the Iran war is stirring public anxiety about future price pressures.
• The impact of the conflict on the economy is not yet clear, Powell said, adding that the central bank is well positioned to respond to either weakness in the labor market or signs of rising price pressures. Inflation has persisted above the Fed’s 2% target for five years. 
• “We don’t know what the economic effects will be,” he said, referring to the war. “We do think our policy is in a good place for us to wait and see,” Powell said during a moderated discussion. The Fed decided on March 18 to hold the main interest rate at a range between 3.5% and 3.75%, noting an uncertain economic outlook.

Dive Insight:

Short-term expectations for inflation have increased in recent weeks as Iran barred most shipping through the Strait of Hormuz, triggering a surge in the price of oil, gas and other commodities.

Futures for Brent crude oil, the global benchmark, have rocketed by about 62% since the Feb. 28 start of the war, from $70 per barrel to $113 per barrel.

Household expectations for inflation in 12 months rose to 3.8% from 3.4% in February in the biggest one-month gain since April 2025, the University of Michigan said Friday, reporting on a survey conducted from Feb. 17 until March 23.

Yet longer-run inflation expectations, as measured by both the University of Michigan and the New York Fed, have remained stable.

Longer run-inflation expectations in March inched down 0.1 percentage point to 3.2%, according to Joanne Hsu, director of the university’s surveys of consumers. The university surveyed consumers from Feb. 17 through March 23, well after the start of the war.

The New York Fed found that median inflation expectations for 12 months in the future fell in February by 0.1 percentage point to 3% and held steady at 3% during the three-year and five-year time horizons.

“Inflation expectations do appear to be well anchored beyond the short term,” Powell said.

The central bank has had to adapt monetary policy to three “supply shocks” this decade, including the pandemic, the imposition last April of the highest U.S. tariffs since the 1930s and the Iran war, Powell said.

“You have to carefully monitor inflation expectations because you can have a series of these supply shocks, and that can lead the public generally — businesses, price setters, households — lead them to start expecting higher inflation over time,” Powell said. “Why wouldn't they?”

Powell acknowledged that policymakers have missed their 2% inflation target for years.

“We've been coming down close to 2% post pandemic, but we've never actually gotten right and stayed at 2%, so it's been a while,” he said. “We're very mindful of that fact.”

At the same time, “energy shocks have tended to come and go pretty quickly,” he said, while noting that “monetary policy works with long and variable lags.”

“So by the time the effects of a tightening and monetary policy take effect, the oil price shock is probably long gone and you’re weighing on the economy at a time when it’s not appropriate,” he said.

Consequently, among policymakers “the tendency is to look through any kind of a supply shock,” Powell said.