Federal Reserve Chair Jerome Powell on Monday said the U.S. central bank can wait to see how the Iran war affects the economy and inflation, noting that policymakers typically look through shocks such as those from higher oil prices.

“We feel like our policy’s in a good place for us to wait and see how that turns out,” Powell said during a presentation to a macroeconomics class at Harvard University. “Inflation expectations do appear to be well anchored beyond the short term.”

As the Iran war enters its fifth week and U.S. gasoline prices rise to around an average of $4 a gallon, the Fed faces a potential squeeze between its two mandates of full employment and price stability.

Inflation has been running above the Fed’s 2% target for about five years, boosted by a series of shocks: the collision of strong demand and constrained supply as the world reopened from the COVID-19 pandemic shutdowns, and more recently by what Powell called the “much smaller” shock from tariffs.

“We’re getting now an energy shock: no one knows how big it will be. It’s way too early to know,” Powell said. “We do think our policy is in a good place for us to wait and see.”

The Fed left its overnight benchmark interest rate steady in the 3.50%-3.75% range earlier this month after the end of a two-day policy meeting.

In a press conference after that meeting, Powell said he would want to see tariff-driven inflation in goods prices subside before even getting to the question of whether the central bank ought to ignore any rise in inflation stemming from the Iran war, or to respond to it with tighter monetary policy to keep inflation from accelerating.

Investors’ inflation concerns since then have contributed to a rise in Treasury yields, and a University of Michigan survey showed a jump in household price expectations in the coming year.

Other measures, including a widely watched market-based gauge, have been more sanguine.

“There’s sort of downside risk to the labor market, which suggests keep rates low, but there’s upside risk to inflation, which suggests maybe don’t keep rates low,” Powell said. “You’ve got tension between the two objectives.”

Financial markets are no longer pricing in much, if any, chance of a rate hike this year, reversing heavy bets on that possibility from last week.

Powell’s remarks were “quite textbook and quite in line with what he said before,” said Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. “The Fed is kind of in a holding pattern until we find a little more about the shape and scope and size of this energy shock that’s ahead of us.”

—

(Writing by Ann Saphir; Editing by Lincoln Feast and Paul Simao)