Powell warns of 'new inflation' from the Iran conflict as gas prices jump 30%

By Brett Arends

Fed Chair Jerome Powell, who remembers 1970s stagflation, is determined to prevent that from happening again.

The energy crisis is going to hit you in your 401(k) as well as in your gas tank if Jerome Powell is right.

Stock and bond funds both fell Wednesday after the Federal Reserve chair warned that the Iran conflict has introduced "new inflation" into the economy and has caused the Fed governors to reconsider any further cuts to short-term interest rates this year.

There had been "a meaningful movement toward fewer cuts" among the 19 members of the Fed's key Open Market Committee, Powell said.

Read: Powell delivers his most definitive answer yet on how long he'll stay on as Fed chair

The surge in energy prices following the attacks on Iran "will push up overall inflation" while raising uncertainties, even while the jobs market remains sluggish, he added.

It's no surprise that the stock and bond markets didn't like the message. Higher inflation means higher short-term interest rates. That's painful for stocks as well as bonds, although, naturally, energy companies benefit.

Average U.S. gasoline prices have now risen by nearly one-third - actually 31% - in a few weeks following the Israeli-U.S. attacks on Iran that sparked the crisis in the Persian Gulf. AAA said average U.S. gasoline prices, just $2.93 a gallon a month ago, have jumped to $3.84 as of Wednesday, up a further 5 cents just in one day.

Powell's comments came after yet more data, largely overlooked by the markets, suggesting that inflation was running too hot, and may even have been speeding up, even before the conflict broke out. The latest producer-price index, or PPI, data, one indicator of price pressure within the economy, accelerated last month and is now running at an annualized rate of 8.7%. It's volatile, so the figure may not be a cause for panic, but it is not a cause for relief either.

The more widely followed consumer-price index was last seen rising at an annualized rate of 3.25%. That's still well above the Fed's 2% target.

More ominous is the movement in the bond market's expectations of where inflation is headed. At this point the U.S. Treasury market is expecting inflation to average above 2.6% over the next five years. Just before fighting broke out in the Gulf at the end of last month it was 2.4%.

Wall Street has been slow to hear what Powell has said for several years - at least since the Fed chair belatedly realized that inflation had turned intractable and began hiking short-term rates in 2022. It is worth remembering that most people on Wall Street are in their 20s, 30s and 40s and know only the years of low and falling inflation.

Powell, who was born in 1953, well remembers the disastrous 1970s when the Federal Reserve bowed to political pressure from the White House and cut short-term interest rates too much and too quickly. The result was a decade of high inflation, which, combined with slow growth and high unemployment, was forever branded as "stagflation" - a combination of stagnation and inflation.

At Wednesday's press conference, Powell specifically rebutted accusations that stagflation was back, arguing that both inflation and unemployment were far lower than they were in the 1970s. But it is clear he doesn't want a recurrence of stagflation to be his legacy. Since 2023, he has repeatedly told the Street he intended to keep short-term rates higher for longer than it expected in order to kill off inflation. It has repeatedly proven slow to understand. Even though the stock and bond markets fell Wednesday, it is not clear the market has yet fully absorbed Powell's message.

The one thing that would cause him to deviate would be a sharp and dangerous economic slowdown, ideally combined with a slump in inflation. But his latest comments suggest this is as far off as ever. Powell downplayed the fears about the jobs market posed by February's slower-than-expected payroll numbers, saying that strikes and bad weather had artificially lowered that month's jobs figures by a hefty 80,000.

And Powell said the jobs figures are further being artificially depressed as a result of the crackdown on illegal immigration, which is reducing the number of people looking for jobs at the same time as it reduces the number of jobs available. The unemployment rate, rather than the absolute job creation figures, is what the Fed is watching most closely, he said.

If all of this makes for uncomfortable reading for ordinary savers, that's no surprise. But if the bond market continues to sell off amid concerns about inflation, energy prices and interest rates, that should at least produce higher interest rates on bonds and CDs down the road.

-Brett Arends

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

03-18-26 1741ET