San Francisco Frontiers - All eyes on Powell with US Fed expected to hold rates steady

Policymakers will weigh the risks of surging energy prices and snarled supply chains due to the US-Israel war on Iran, with analysts widely expecting a third pause in a row as the effects of the conflict ripple through the world's largest economy.

All eyes will be on Powell's future plans at what could be his final press conference as head of the Fed on Wednesday afternoon.

While the central bank chief's tenure as chair ends May 15, his term as a member of the board of governors continues until January 2028.

Since returning to power last year, Trump has frequently criticized and insulted Powell for not cutting interest rates -- a policy that would turbocharge economic activity but could fuel inflation.

In January, Powell made headlines when he revealed Trump's Justice Department had opened a criminal probe against him over cost overruns on a building renovation project.

Powell called the move a pressure tactic designed to erode the Fed's independence, and vowed to stay on until the investigation was concluded "with transparency and finality."

Republican Thom Tillis on the Senate's banking committee supported Powell's position, saying he would hold up confirmation of Trump's Fed chair nominee, Kevin Warsh, until the probe was dropped or completed.

On Friday, the Justice Department said it was dropping the investigation, and Tillis indicated days later that he would support Warsh's confirmation.

Trump's assaults on the Fed have been unprecedented. He has also attempted to unseat another Fed governor, Lisa Cook, over fraud allegations. A Supreme Court case on that attempt is ongoing.

Given that context, analysts were divided on whether Powell would stay on as a member of the board even after his term as chief ends -- a situation that would be unusual, but not without precedent.

Gregory Daco, chief economist at EY-Parthenon, said he thought Powell would remain, adding that it "would help preserve institutional continuity, anchor the existing communication approach, and provide a stabilizing counterweight during the transition."

- Future path -

While much attention will be on Powell's plans, policymakers will be focused on the way forward for the US economy, as it battles years of higher-than-expected inflation and recent weak jobs growth.

The Federal Reserve has a dual mandate of keeping inflation to its long-term two-percent target while ensuring maximum employment.

Higher energy prices due to the Middle East war caused US inflation to spike in March, and while such supply shocks are often treated as temporary, central bankers have expressed concern that effects could be more lasting.

Surging energy prices could also slow down economic activity by raising production costs, affecting the employment side of the mandate.

In a note, Oxford Economics said there was "virtually no chance" that rates would be cut at this week's meeting.

"We'll look for any indication that Fed officials' assessment of the risks to their outlook has changed since the mid-March meeting," wrote Nancy Vanden Houten, lead US Economist at Oxford Economics.

At their last gathering, Federal Open Market Committee members said the risk of inflation rising and growth slowing had increased since the start of the war.

The Fed had been on a path of rate cuts late last year, buoyed by progress in its fight against inflation and aimed at addressing the labor market weakness.

Now, however, analysts say the way forward is far from clear.

"There is, in my opinion, a non-negligible possibility that the statement could incorporate a two-sided formulation that would acknowledge that rate hikes could be appropriate if inflation remains above-target," Daco told AFP.

W.Thompson--SFF