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Good afternoon. My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people.
The FED Reserve announced this afternoon it would keep interest rates steady.
Today, the FMC decided to leave our policy rate unchanged.
That's in spite of spiking oil prices and new market uncertainty driven by the Iran war. FED chair Jerome Powell took the podium to explain the rationale behind today's decision.
The implications of events in the Middle East for the US economy are uncertain. In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy.
Bloomberg Fed reporter Amera Amokway says that the FED is essentially in weight and see mode when it comes to the conflict and the impacts that could have on the economy.
Obviously, energy, oil, those are all inputs that matter for production for service producing businesses, and so if you start to see inflationary pressures sort of broadened beyond the energy sector, itself into other parts of the economy that I think would be of concern to FED policy makers, But they will also then be watching the real side of the economy. Does the spike and oil prices then have negative implications for growth, which then trickles over to the labor market?
Do we start to see job losses? Do we start to see consumers pull back? Do we start to see businesses pull back?
If we start to answer yes to those questions, the Fed's dual mandate of keeping prices stable and promoting maximum employment gets a lot trickier the tools it has to address inflation, like raising interest rates could make the labor market worse, and lowering rates to address unemployment could lead to higher inflation. Warton Associate Professor Peter Conti Brown puts it more simply.
In so many respects, this is the Fed's worst nightmare.
I'm David Gera, and this is the big take from Bloomberg News today on the show, how the FED is thinking about the Iran War, why it held rate steady, and what could shift its calculus in the months ahead. The part of the Federal Reserve that sets interest rates is called the Federal Open Market Committee. Those policymakers have a tough job. Under normal economic conditions, they have to predict where they think the economy is going by looking
largely at data the show where it's been. And in the last few weeks, with the start of the Iran War, predicting where the economy is heading has gotten much much harder. To understand how the FED is approaching this challenging time, I talked to Bloomberg Fed reporter Emera Amoquay and Wharton professor Peter Conti Brown, who's a FED historian. For starters, I asked Emera what factors the policymakers considered as they decided where interest rates should be right.
Now, there was a pre Iran war perspective, and the situation has obviously shifted dramatically now that we have the conflict in Iran. So after the last meeting in January, you got the sense that FED officials broadly agreed that they had policy in a good place. They cut three
times towards the end of twenty twenty five. The labor market appeared to be steadying after jitters earlier in twenty twenty five, and they didn't cut in January, and you heard Chair Jerome Poue and several other policymakers saying they thought policy wasn't a good place, and some of them were really expressing concerns about the fact that inflation remains above the fed's target, and that it has been above
target for five years now. Then the US and Israel launched this war on Iran, and that has really kind of scrambled the outlook and raises a lot of questions about how the FED will proceed in months ahead if we start to see their policy goals promoting maximum employment and bringing inflation back down start to come into conflict because we have seen oil prices shoot sharply higher. That has potential implications for inflation. It also has potential implications
for economic growth and the labor market. And so the question now for the FED is if this energy shock that we're seeing now persist, how might they approach that.
Peter, the policymakers are looking at this famous dashboard. Look at all of these economic data points, and so many of them came before Israel in the US launched that war. How does that complicate what a marriage is talking about their ability to kind of figure out where the economy is and where it's.
Going Should the Iran war be temporary, should the strait of horm Us and the rapid deterioration of vessel flow through that straight and be relatively short lived, then this presents a very challenging dynamic for the FED to navigate, but it knows how to do this. Should that be prolonged, it's not just very challenging. This becomes the impossibility theorem.
This is stagflation.
This is you don't know which lever to pull because you exacerbate either one of your two new endates. When you have all of the dashboard lights flashing rainbow colors because you don't know exactly where we will be four weeks from now, let alone four months from now, then this creates an unbelievably difficult trajectory. Add to that, what America's saying is that we have not reached disinflation to
target right. So this level of uncertainty makes policy making in any given FMC meeting playing darts with a blindfold, the FED is going to be exceedingly unlikely to sprint.
Into the breach to wave off a recession.
If inflation is moving up even incrementally, if it's moving up quickly, then I think it's inconceivable for the FED to prioritize unemployment over an inflationary spiral.
Peter, you're a FED historian, and I'm curious what analogs you're looking to at this moment. So there is all of this uncertainty over what the FED is doing right now, what it's going to be doing at subsequent meetings. Is there a parallel that you reach for to this.
Moment, Yeah, there are too. There was the oil shock of nineteen seventy three.
It's important to remember that the context there, So we had an oil embargo announced by OPEK led.
By Saudi Arabia.
Inflation was already about nine percent of the time, so it was a different inflationary environment than we have today.
But that oil.
Embargo had unbelievable effects, and so it exacerbated the inflationary context. Well, recessionary consequences were also ticking up. This leads into just an unbelievably bruising decade of FED policy wherein to finally slay the dragon of inflation, Paul Volker's FMC had to trigger a recession so profound it was getting close to Great Depression territory, and indeed, until the Great recession. It was the most acute recession that we had experienced since
the nineteen thirties. So that's the bad historical analog. The better one would be the late forties and early fifties. This is the time when the FED separated itself from under the Treasury's domain to a shirt for itself, more independence and setting industrate trajectories at a time when inflation looked like it was going to have a post war pop that would be very hard to eradicate.
But that never happened.
It never took root, and as a result, we had just extraordinary economic growth with relatively mild inflation. So we want things to look like the fifties, We fear the things are looking like the seventies.
Amara, As you listened to FED policymakers in the run up to this meeting, how much was that history coloring their sense of this moment. How evident was it that they were thinking back about those two instances that Peter just mentioned.
So we didn't hear from many FED policy makers after the launch of the war. We heard from a few, like a handful, talking about sort of this textbook approach to oil shocks, to energy shocks, which would say that if the shock is a short term thing, the FED
should look through it. In other words, the FED doesn't necessarily need to raise rates because the FED is thinking about policy on a medium to long term outlook, and so if something is going to be short lived, you don't want to overreact to that and set policy according to that.
What does it mean for the FED to look through something?
When we use the metaphor of looking through, and it is a metaphor you're saying because you're saying there's some sort of tumult in front of you that you can see the end of, you can see the other side of, and the other side looks more like where we were before the tunnel than it does in the tunnel. Because if the tumult is the new normal, then there's no looking through. You have to adjust to the new normal. And that's what the FED doesn't have the luxury of doing.
Are we going to see as a result of whatever is happening in the Middle East today, a fundamental reordering of the way that we do geopolitics, energy policy, macroconomic growth alliances? And if the answer to that is yes, there's no looking through, the tumult is us and that's what the FED has to adapt to.
Peter, I'm curious how the FED is trying to encourage stability in the bond market at this moment. Mean, there's been so much volatility as the result of this war getting underway. What are policymakers trying to do to kind of calm things down so much as they can.
I think this is one of the reasons why this is kind of a Nimer scenario. The Fed's primary tools for calmon bond markets is to assure the markets of its medium and long term credibility that no matter what happens in the world, whether we have to look through these episodic supply shocks or whether we incorporate them into our diagnosis and prognosis, the FED will be grown ups in the room to do the right thing for the
long term stability of the US dollar. And those are assurances that are very difficult to make when what we're trying to predict is whether this is going to be an inflationary environment, not just because of the Iron War, but because the deterioration of norms of FED independence, or
this is going to be a recessionary environment. We haven't talked about the other elephant in the room, which is whether AI will be writing us the economy on a rocket toward greater productivity and rate compression, or the white collar recession that will send unemployment rates into double digits. And given that amount of uncertainty, the only thing that the FED can do reassure bond markets is to continue to say we don't know what the right policy is, except we do know that we will find it.
Coming up the challenges facing the Federal Reserve as it tries to find the right policy in the face of attacks on its independence and dissent among policymakers, and the latest developments as Jerome Powell reaches the end of his term as chair in the midst of a DOJ investigation into him and the FED, Peter looking at the crucible of the FOMC and thinking about history, do moments like this tend to lead to more unanimity among policymakers or
more division. We went through this period where it seemed like FED Chair Jerome Powell had a lot of success in getting members of that committee to come on board with what he hoped the committee would do. We've seen that eroad a bit in recent meetings. Is this historically a time when the FED is more unified, when there is a large geopolitical risk like this one.
You know, in the cycles of history of division and union and consensus. On the political side, we have enough data points to really see cycles, but at the FED we don't, and the reason is because we simply don't have the tradition of a lot of dissensus at the FOMC, at least formally as tallied by votes. And in that sense, this is another factor that makes the current FOMC extraordinarily difficult to predict. And that's not because we have ten central bankers who see it one way and two who
see it another. That's pretty consistent over time. It's that we have the famous double descents that we have not seen for many years. That means, for those who are kind of outside that FED speak universes, that we have the consensus view, that's the policy view that commands the majority of the FMC, and then we have dissents going in both other directions. So saying you're being too restrictive, say one group, and you're being too accommodative says another.
And that's what we have right now, although not in the January meeting, But in the meetings prior we had double descents, and that makes it really hard to predict what the Iran policy will mean for the FMC. Unlike in a political context, for sometimes we have these external wars creating a rally around the flag moment, there's not that same ethos because the questions are fundamentally different.
Amara. We started off with you talking about how much has changed here over these last few weeks, and I look at this note, a recent note from Deutsche Bank, and that economics team rights a question that was almost unthinkable two weeks ago is now being more heavily debated. Could the FED raise rates in twenty twenty six? You talked about how the economy has shifted, the forecast for
the economy have changed. How about just in terms of what market participants are expecting the Fed to do in the week's end, the weeks and months ahead.
I think people are not really expecting another cut under chair Pale, whose term ends in May. But I think it's interesting because even if you look at the minutes from the January meeting, there were some officials who were already talking about hikes then, who were saying, look, inflation has been too high for too long, and we actually need to adjust what we're saying about the situation to acknowledge the facts that moves in the future may need
to be higher. And so for those as Peter was talking about, those policymakers who are more concerned about inflation, you could see a world where this Iran situation, if it continues, could only heighten their concerns and maybe make them have less of an appetite to respond to any downside that we see on the real side of the economy, you know, for economic growth, for the labor market, because
there are new inflationary pressures. And so I think what markets and investors are going to be listening closely for in this meeting and in subsequent meetings if this situation continues, is how Chair Poal is sort of characterizing the vibe on the committee and how he's really thinking about balancing
these two risks in the months ahead. And that matters also because as it stands now, Chairpow could perhaps still be on the board even past his chair term in May, and he could still be chairing the FOMC past his chair term in May, and so I think people are still going to be looking for some signal from Chair pow in these final meetings under his chair term.
Right, So, Peter Jerome Powell's tenure as FED share is supposed to end this spring, but he told reporters today that if his successor is not confirmed by the end of his term, he would serve as Chair pro tem until then. Howell also told reporters he wouldn't leave the FED Board while a Department of Justice investigation into him and the Federal Reserve is ongoing, and all of this relates to a renovation project of the Federserve's headquarters and
testimony that j. Powell gave about that renovation. A few days ago, a judge blocked subpoenas that were a part of that investigation, and the DOJ has vowed to appeal that. How could all of this that legal fight influence the way the FED is handling decisions going forward and how the confirmation process for Powells successor plays out.
I think the announcement that the Department of Justice is going to appeal the legal decision from the district court increased my priors from I think that there was a substantial minority probability that Share Powell would continue on as governor to now think that is likelier than not that Chair Palell is not going anywhere. And because Tom Tillis Senator from North Carolina has stayed resolute in his determination that so long as criminal proceedings are open against j Pal,
there will be no confirmation hearing for his successor. But we also heard something that was from the lawyers representing in ja Palell which they told the Department of Justice that so long as this investigation is pending, jay Pal's not going anywhere, he will be staying at the FED. And as now, putting on my legal hat, I would say that is if I were asked for legal advice from the Palateam, that's exactly what I would tell them.
You go nowhere, you say exactly where you are.
You put yourself in an expanded legal and criminal peril should you leave. And so you stay where you are, You continue to be represented by the fed's lawyers, you continue to exercise that political coalition that's going to be
plugged into the FED. And if that's true, that scrambles the governance story by a lot, and that means not only are we likely to have ja Pal's stag in place, we are also likely for the first time in the Fed's history to have you know, an Avignon pope, Two popes at the FED, two chairs, meaning that as soon as his term is up as FED Chair, it is likely to be the case that Vice Chair Jefferson will take over.
For those board duties.
But the FOMC, which elects its chair on an annual basis, will keep Powell in place until his successor is named. Indeed, that is what they announced in January when they held that election. And so we will have a FED Chair j Powell have the FOC, and we will have a FED Chair Philip Jefferson at the board, and we will have a raging president who doesn't like either of them and wants to do something.
A third thing, and.
My only advice to FED watchers everywhere is grab your tissues and grab your bucket of popcorn, because this tragic comedy is just you know, beginning.
This is the Big Take from Bloomberg News. I'm David gurat To get more from the Big Take and unlimited access to all of Bloomberg dot Com, subscribe today at Bloomberg dot dot com slash podcast offer. If you'd liked this episode, make sure to follow and review The Big Take. Wherever you listen to podcasts, it helps people find the show. Thanks for listening. We'll be back tomorrow.