Surging oil prices, weakening employment, judicial investigations: Powell faces the "toughest" policy meeting this week

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Although the market generally expects the Federal Reserve to keep interest rates unchanged this week, the situation in the Middle East and divergent employment signals are pushing monetary policy into a dilemma.

Brent crude has surpassed $100 per barrel, reigniting inflationary pressure; February's non-farm payrolls were unexpectedly weak, casting a shadow over the labor market outlook. The two major goals are sending contradictory signals: High oil prices restrict the room for lowering rates, while weak employment points to the need for easing. Powell and the FOMC are facing an increasingly narrow policy window. According to CME FedWatch data, the market estimates a 99% probability that the Fed will keep rates in the 3.5%-3.75% range this week.

Meanwhile, the political controversy surrounding Fed Chair Powell has yet to subside, with the Justice Department investigation and prospects for a leadership transition still unresolved. A federal judge last week dismissed the Justice Department's subpoena against the Federal Reserve, but prosecutor Jeanine Pirro vows to continue the appeal, and this legal process may disrupt the Fed's May leadership transition arrangements.

Oil price shock disrupts policy rhythm

After three consecutive rate cuts at the end of 2025, the Fed held policy rates steady at the 3.5%-3.75% range in January of this year. At that time, the labor market was stabilizing, and officials generally leaned toward keeping rates unchanged for a sustained period to continue suppressing inflation, which has exceeded targets for five straight years.

However, the outbreak of the Middle East conflict disrupted this established rhythm. Brent crude prices broke through the $100 per barrel threshold. Some officials cited “textbook” logic, believing the impact of energy price shocks on inflation is temporary and does not warrant a policy response.

But Aditya Bhave, senior U.S. economist at BofA Securities, pointed out, whether this strategy works depends on the duration of the conflict, whether public inflation expectations remain stable, and whether rising energy prices can avoid spreading to other sectors.

Further complicating the situation is that inflation is not the only concern. If oil prices remain elevated, consumption, growth, and employment could all come under pressure, and this combination actually points toward rate cuts rather than hikes. Data released last Friday showed consumer spending in January was nearly stagnant, indicating the U.S. economy had begun losing momentum before the conflict erupted.

Internal divisions, inflation assessment not unified

Before the Middle East conflict broke out, the Fed was already split over the inflation path. Governor Christopher Waller believed that after removing the temporary effects of tariffs, inflation was moving toward target trajectory; while some officials worried that prolonged high inflation had eroded central bank credibility.

Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives, pointed out that differing positions will determine how much tolerance officials have for new inflation pressures. “If you believed before a shock that inflation was more troublesome and restrictive policy would need to be maintained longer, then new shocks mean greater risks,” she said, “so you may not want to respond to signals of weaker growth or employment.”

Meanwhile, Waller, Vice Chair for Supervision Bowman, and Governor Milan have continued to signal rate cuts are on the table, pointing to signs of fragility in the labor market. Notably, dissenting votes have appeared in each of the past five Fed meetings and are expected to continue this week.

Former Cleveland Fed Chair Loretta Mester summarized: “On the employment side there's downside risk, on the inflation side there's upside risk, the committee is internally divided, and the right answer isn’t obvious.”

Policy signals: observe and avoid hasty statements

At 2 p.m. local time this Wednesday, the Federal Reserve will release its latest policy statement, followed by Chair Powell’s news conference at 2:30 p.m., and officials will simultaneously release updated economic forecasts and the interest rate dot plot.

Michael Pugliese, senior economist at Wells Fargo, expects the statement and Powell’s remarks to acknowledge rising uncertainty while stressing the need for flexibility. “The market wants more certainty on the geopolitical outlook,” he said, the Fed may stick to the ‘do no harm first’ principle—‘They don't want to react hastily and later have appeared to misjudge.’

Powell will also face questions about the labor market. February’s non-farm payroll report was unexpectedly weak, which may prompt him and other officials to revise previous assessments of stabilization in the labor market.

Judicial turmoil may affect leadership transition

Political uncertainty is likewise not to be ignored.

Last week, U.S. District Chief Judge James Boasberg ruled to quash the Justice Department’s January subpoena to the Fed related to the headquarters reconstruction project, citing “lack of evidentiary support,” and pointed out there was evidence the Justice Department aimed to pressure Powell, not for his rate cuts or resignation.

However, U.S. prosecutor Jeanine Pirro promptly stated she would appeal, and the legal process may interfere with the confirmation of Trump’s nominated successor, Kevin Walsh. North Carolina legislator Thom Tillis has clearly said he will not advance Walsh’s confirmation vote until the Justice Department’s investigation is fully concluded.

Powel’s term as Chair of the Fed Board of Governors expires in May this year, but his term as governor runs until 2028, which means he is still eligible to remain Chair of the Federal Open Market Committee.

Court documents show Fed lawyers disclosed that Powell has stated clearly that, to uphold central bank independence, “with criminal investigations unresolved, he cannot resign.” Powell himself has not openly said whether he will remain in office.

Risk warnings and disclaimerThe market involves risks and investment requires caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment goals, financial situation, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article suit their own circumstances. Investment based on this is at your own risk. ```