The Fed’s Tightrope: Jerome Powell’s Silent War Against Resurgent Commodity Prices

A certain silence descends upon a press conference when a central banker declines to provide a direct response. Anyone who has watched Jerome Powell long enough can tell the difference between the silence of evasion and the silence of genuine uncertainty. Powell admitted to reporters on a Wednesday in March that inflation would rise as a result of the Middle East conflict and its domino effect on oil prices. Then he came to a halt. No figures. No chronology. No projection with assurance. Just a deliberate, cautious refusal to act as though he knew more than he actually did. You learned nearly everything from that restraint.

In the last month, oil has done something that the majority of economists had secretly hoped they would never witness again in their professional lives. By the middle of the week, both West Texas Intermediate and Brent crude were trading above $100 per barrel, having both increased by more than 50%. At their highest point, they momentarily surpassed $119, reaching levels not seen since the spring of 2022, when Russia’s tanks were still advancing through Ukraine and the world was only starting to realize how severely a conflict could disrupt the world’s energy markets. The Fed has already entered its most aggressive rate-hiking cycle since the 1980s as a result of that incident. Now, before the last one’s dust has completely settled, another one arrives.

Powell’s operating environment is what makes this moment feel different and more risky. For five years running, inflation has exceeded the Fed’s 2% target. It’s not a blip. Powell is aware that there is a structural issue with compounding credibility risk. When inflation expectations were stable and consumers believed that prices would eventually decline, the old strategy—in which central banks simply “look through” energy shocks on the presumption that they are transient and self-correcting—worked well. No one in official Washington seems willing to publicly state whether or not that trust still exists today.

The historical weight bearing down on this moment is difficult to ignore. Fed Chair Arthur Burns made a crucial decision in 1973 when he saw the price of crude oil quadruple during the Yom Kippur War: put employment ahead of inflation. He prevented rates from increasing too quickly. An entire generation of American consumers and policymakers suffered as a result of ten years of stagflation. After spending the majority of the early 1980s clearing up that mess, Paul Volcker raised interest rates to 20%, which led to a severe recession but ultimately ended inflation’s hold. Powell has researched both men. It’s evident in the deliberate manner in which he speaks, as though every word has weight.

For a man who typically deals in purposeful ambiguity, Powell’s description of the tension during the March press conference was remarkably straightforward. He described the dilemma as “upward risks for inflation and downward risks for employment,” putting it simply. Naturally, this is the classic stagflation trap, which is characterized by rising prices and weakening growth. No Fed chair wants to inherit this situation because there isn’t a clean policy tool that can solve both issues simultaneously. Raising rates slows hiring but combats inflation. Reducing rates keeps jobs safe, but it drives up prices. In reality, the middle path—staying calm and waiting—is just a different kind of risk.

Following the weak February jobs report, Fed Governor Chris Waller reportedly thought about lowering interest rates, but he changed his mind when it became apparent that the Iranian conflict might not end soon. He told CNBC that “if it stays high for months on end,” oil affects production costs in almost every industry. Waller’s reluctance is illuminating. It implies that there is genuine internal discussion at the Fed regarding which risk is more pressing at the moment—not a consensus or a unified front, but rather a group of serious individuals staring at incomplete data and trying their hardest.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, has noted the historical trend that the Fed fights inflation most vigorously when its credibility is clearly in jeopardy. That may be the current state of affairs. The institution cannot afford to dismiss a situation that is five years ahead of schedule by citing brief disruptions. However, studies of past oil shocks, such as the Gulf War era of 1990 and 1991, demonstrate that the state of the economy at the time of the shock is crucial. Instead of raising rates in the face of a faltering economy, Alan Greenspan kept them constant, and the Fed didn’t cut rates until a mild recession had already begun. It turns out that everything is shaped by context.

Ordinary Americans are already experiencing this in the most direct way possible outside of the realm of policy briefings and econometric models: at the gas pump, in utility bills, and in the slow increase in prices of products that rely on petroleum-based inputs. Most people are unaware of how long that list is. Fertilizers, packaging, transportation, plastics—oil affects production throughout the economy in ways that don’t always immediately appear in headline figures but eventually do. Powell agreed, pointing out that “there are lots of ways that oil and the derivatives of oil get into production.” This time, the second-order effects might materialize more quickly than the Fed anticipates.

Whether this shock is temporary or long-lasting is still unknown. Powell’s cautious holding strategy will seem prudent in retrospect if the Iran conflict defuses in the upcoming weeks and crude falls back toward $75 or $80. The Fed may be forced to choose between two difficult options rather than carefully avoiding both if oil remains above $100 throughout the summer, let alone rises. If that decision is made, Powell’s legacy will be defined in a way that no prior rate cycle has. He was never walking a very wide tightrope. It feels narrower than ever right now.