Fed Could Signal No Interest Rate Cuts 03/18 06:24

   

   WASHINGTON (AP) -- A key question hangs over the Federal Reserve's two-day 
meeting that ends Wednesday: Will central bank policymakers still reduce 
short-term interest rates this year, now that the Iran war has sent oil prices 
higher and gas prices spiking? Or will they have to stand pat for months to see 
how the conflict plays out?

   Fed Chair Jerome Powell is almost certain to announce Wednesday that the 
central bank has kept its key rate unchanged for the second straight meeting at 
about 3.6%. But the Fed will also release a set of quarterly projections, and 
they could alter their forecast of one rate cut this year to zero. While such a 
change might seem minor, it would be a major course correction after 18 months 
of on-again, off-again rate cuts.

   Wherever the Fed comes down, it is a particularly difficult time for 
policymakers to issue economic projections. The Iran war that the Trump 
administration launched Feb. 28 has already sent gas prices soaring and will 
push up inflation for at least the next month or two. The Fed will have to 
raise the inflation forecast it issues Wednesday from where it stood in 
December, when Fed officials projected inflation would fall to 2.6% by the end 
of this year.

   Many economists expect the Fed will forecast that inflation will remain as 
high as 3% even by late 2026. An increase of that magnitude could be hard to 
square with more interest-rate cuts.

   At the same time, the jump in gas prices -- if it is high enough and lasts 
long enough -- could slow the economy, as more consumer spending is eaten up at 
the pump, leaving less money to be spent on other goods and services. As a 
result, unemployment could move higher later this year.

   On Tuesday, gas prices averaged $3.79 a gallon nationwide, according to AAA, 
up 88 cents from a month ago.

   Those two outcomes -- higher inflation and higher unemployment -- typically 
lead the Fed in opposite directions. The central bank keeps its key rate 
unchanged -- or even increases it -- to fight inflation, while it cuts rates to 
boost spending and hiring. A combination of rising prices and higher 
unemployment is generally the worst-case scenario for central bankers.

   At the same time, this week's meeting will be among the last with Powell as 
chair. His term ends May 15 and President Donald Trump has nominated a former 
top Fed official, Kevin Warsh, to replace him. Yet Warsh's nomination has been 
delayed in the Senate because key Republican senators have objected to a 
Justice Department investigation of Powell over his testimony about a building 
renovation.

   Last Friday, a judge threw out a pair of subpoenas that the Justice 
Department had issued to the Fed, dealing a blow to the investigation. But U.S. 
Attorney Jeannine Pirro has said she will appeal the ruling.

   This week's meeting will be Powell's second-to-last, unless Warsh isn't 
confirmed by May 15, at which point Powell could remain chair of the Fed's 
rate-setting committee until a replacement is named.

   Even before the Iran war, problems had cropped up in both the inflation and 
jobs data, putting the Fed in a tight spot. Prices rose more quickly in January 
than in recent months, according to the Fed's preferred measure, with inflation 
excluding food and energy reaching 3.1% compared with a year earlier. That is 
little changed from where it was two years ago, a sign that prices are still 
rising at a stubbornly elevated pace.

   Yet hiring has also stumbled. Businesses and other employers shed 92,000 
jobs in February, the government reported earlier this month, an unexpectedly 
weak showing that followed an encouraging gain of 130,000 in January. The 
unemployment rate ticked higher to a still-low 4.4% from 4.3%.