Fed chief Powell says risks to economy suggest rates could go lower or higher

By Greg Robb

Wall Street grows more worried about growth impact from higher gas prices

Chair Jerome Powell and his Federal Reserve colleagues have penciled in one rate cut for 2026.

Federal Reserve Chair Jerome Powell kept his options open about how the central bank would react to the economic effects of the Iran war, saying interest rates may need to be lower or higher, given the risks to the outlook.

During a talk at Harvard University, Powell said that there's "sort of downside risk to the labor market, which suggests keep rates low, but there's upside risks to inflation, which suggests maybe don't keep rates low."

Powell said the Fed is committed to getting inflation back to its long-range annual target of 2%. The Fed's favored measure of inflation has been above 2% since 2021.

Powell said the Fed is well aware that it hasn't hit its inflation target in six years.

The central bank, he said, isn't facing an imminent decision on what to do with rates because "we don't know what the economic effects" of the Iran war will be. "We feel like our policy's in a good place for us to wait and see how that turns out," Powell said.

At its meeting in mid-March, the Fed's so-called dot plot pointed to one rate cut this year. The Fed's statement also indicated that the next interest-rate move would be a cut.

A minority of Fed officials pressed for the March statement to indicate that rates could rise or fall.

Read more: Futures traders see better chance of at least one rate cut in 2026 after latest comments from Fed's Powell

Financial markets have begun to focus on the potential for elevated oil prices to have more damaging consequences for growth instead of higher inflation, Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said in a note to clients.

If consumers have to spend more for gasoline, they will cut back on discretionary spending. Lower spending could cause companies to cut hiring, which would raise the unemployment rate.

Following Powell's remarks, traders in derivative markets think a rate cut is more likely than a hike this year.

In his comments Monday to students in Cambridge, Mass., Powell said the standard playbook calls for the Fed to "look through" an oil-price shock because it won't last long. But it is critical that the public not expect higher inflation.

At the moment, inflation expectations - a measure of what consumers and businesses think about prices - look stable, Powell said.

That's a critical measure for the central bank. If Americans come to expect higher inflation, economic research suggests prices will start to move higher.

The Fed chair downplayed worries that private-credit defaults would spiral into another financial crisis like 2008.

Read more: How the economy would weather private-credit defaults rising to financial crisis-like levels

"What we see is, you know, a correction going on, and certainly there'll be people losing money and things like that. But it doesn't, it doesn't seem to have the makings of a broader, systemic event," Powell said.

Krishna Guha, vice chairman of Evercore ISI, said the Fed could cut for a few reasons - either good news on inflation or bad news on the labor market.

"We think the bar to a hike is high and all the more so with [Kevin] Warsh due to take over as Fed chair in May," he said, in a note to clients.

-Greg Robb

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03-30-26 1246ET