Surging Oil Prices, Weakening Employment, Legal Investigation: Powell Faces "Toughest" Policy Decision Meeting This Week

Although the market widely expects the Federal Reserve to keep interest rates unchanged this week, diverging signals from Middle East tensions and employment data are pushing monetary policy into a dilemma.

Brent crude oil has surpassed $100 per barrel, reigniting inflation pressures; February non-farm employment unexpectedly weakened, casting a shadow over the labor market outlook. Two major indicators send conflicting signals: high oil prices constrain the room for rate cuts, while weak employment points to accommodative demand. Powell and the FOMC are facing an increasingly narrow policy window. According to CME FedWatch data, the market prices a 99% chance that the Fed will hold rates steady between 3.5% and 3.75% this week.

Meanwhile, political turmoil surrounding Fed Chair Powell remains unresolved, with Department of Justice investigations and the leadership transition uncertain. Last week, a federal judge dismissed the DOJ’s subpoena against the Fed, but prosecutor Jenny Perro vowed to appeal, potentially disrupting the Fed’s leadership handover scheduled for May.

Oil Price Shock Disrupts Policy Rhythm

After three consecutive rate cuts by the Fed ending in 2025, the policy rate was held steady at 3.5% to 3.75% in January. At that time, the labor market had stabilized, and officials generally favored maintaining rates for an extended period to continue suppressing inflation that had been above target for five years.

However, the outbreak of Middle East conflict has disrupted this rhythm. Brent crude oil prices have surged past $100 per barrel. Some officials cite “textbook” logic, believing energy price shocks have only temporary effects on inflation and do not warrant policy responses.

But Bank of America senior US economist Aditya Bhave points out that the effectiveness of this strategy depends on the conflict’s duration, whether public inflation expectations remain stable, and if energy prices can avoid spreading to other sectors.

Adding to the complexity, inflation is not the only concern. If oil prices stay high, consumer spending, growth, and employment could all be pressured, which would favor rate cuts rather than hikes. Data from last Friday showed consumer spending in January nearly stalled, indicating the US economy was already losing momentum before the conflict escalated.

Internal Disagreements, Uncertain Inflation Outlook

Before the Middle East conflict erupted, there were already cracks within the Fed regarding inflation outlook. Governor Christopher Waller believes that, excluding the temporary impact of tariffs, inflation is on target; while some officials worry that long-term high inflation has eroded the central bank’s credibility.

MacroPolicy Perspectives senior economist Laura Rosner-Warburton notes that different stances will determine how much officials are willing to tolerate new inflation pressures. “If you believed inflation was more stubborn and needed longer restrictive policies before the shock, then a new shock means greater risk,” she said. “You might be less willing to respond to signals of slowdown in growth or employment.”

Meanwhile, Waller, Vice Chair for Supervision Michael Barr, and Board member Milan continue to signal a willingness to cut rates, citing signs of labor market fragility. Notably, the Fed has seen dissenting votes in all five recent meetings, and this week is likely to continue that pattern.

Former Cleveland Fed President Loretta Mester summarized: “Employment faces downside risks, inflation faces upside risks, and there is division within the committee; the right answer is not obvious.”

Policy Signals: Stay Observant and Avoid Hasty Statements

On Wednesday at 2 p.m. ET, the Fed will release its latest policy statement, followed by Chair Powell’s press conference at 2:30 p.m., with officials also releasing updated economic forecasts and the dot plot.

Wells Fargo senior economist Michael Pugliese expects the statement and Powell’s remarks to acknowledge increased uncertainty while emphasizing the need for flexibility. “Markets want more clarity on geopolitical outlooks,” he said. The Fed may adhere to the principle of “first do no harm,” avoiding hasty reactions that could later prove mistaken.

Powell will also face questions about the labor market. The weaker-than-expected February non-farm payrolls may prompt him and other officials to revise their previous view that the labor market is stabilizing.

Judicial Turmoil May Affect Leadership Transition

Political uncertainties are also significant.

Last week, U.S. District Judge James Boasberg dismissed the Department of Justice’s subpoena related to the Fed’s headquarters restructuring, citing “lack of evidence,” and pointed out evidence suggesting DOJ aimed to pressure Powell rather than target rate cuts or resignation.

However, DOJ prosecutor Jenny Perro announced plans to appeal, potentially interfering with the confirmation of Trump’s nominee Kevin Wirth as his successor. North Carolina Congressman Thom Tillis has stated he will not advance Wirth’s nomination until the DOJ investigation is fully resolved.

Powell’s term as Fed Chair will end in May, but his Fed Board term runs until 2028, meaning he remains eligible to continue as Chair of the FOMC.

Court documents reveal that Fed lawyers disclosed Powell has stated that, to preserve the central bank’s independence, “he cannot resign while a criminal investigation is pending.” Powell has not publicly commented on whether he intends to stay on.

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