'Very Difficult Situation': Fed's Powell Warns Iran War Could Complicate Global Recovery

The global economy is entering a period of heightened uncertainty as geopolitical tensions escalate in the Middle East, according to Jerome Powell, who warned that the conflict involving Iran could disrupt the fragile balance between growth and inflation.

Speaking after the latest policy meeting of the Federal Open Market Committee, the Federal Reserve chair said policymakers are watching the situation closely as energy prices surge and financial markets react to the escalating conflict.

“The thing I really want to emphasize is that nobody knows: the economic effects could be bigger, they could be smaller; they could be much smaller or much bigger; we just don’t know,” Powell said.

The remarks show the uncertainty facing central banks globally as geopolitical tensions begin to influence inflation, growth and monetary policy expectations.

Oil Shock Raises Inflation Concerns

Energy markets have been among the first to react to the conflict, with global oil prices climbing sharply. Brent crude has moved above $113 per barrel, raising fears that rising fuel costs could push inflation higher once again.

Powell acknowledged that the surge in energy prices is likely to show up in inflation data. “In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy,” he said.

For central bankers, the uncertainty lies in how long the shock might last and whether higher energy costs could spill over into broader price pressures across the economy. “We’re right at the beginning of this, and we don’t know how big, you just don’t know how big this will be and how long it lasts,” Powell added.

Fed Keeps Rates Unchanged

The Federal Reserve decided to hold its benchmark interest rate in the 3.50% to 3.75% range, maintaining a cautious stance while policymakers assess incoming economic data.

The central bank has also revised its inflation outlook. Officials now expect inflation to end the year around 2.7%, higher than the 2.4% forecast made in December.

Powell indicated that any future decision on rate cuts will depend heavily on whether inflation continues to move toward the Fed’s target. “If we don’t see inflation progress, you won’t see a rate cut,” he said, adding, “We are well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data.”

Powell Pushes Back On Stagflation Fears

The surge in oil prices has revived concerns among economists and investors about the possibility of stagflation, which is a combination of weak economic growth and persistently high inflation.

Powell, however, cautioned against drawing parallels with the economic turmoil of the 1970s. “I would reserve the term stagflation for, you know, a much more serious set of circumstances. That is not the situation we’re in,” he said, adding, “What we have is some tension between the goals and we’re trying to manage our way through it. It’s a very difficult situation, but it’s nothing like what they faced in the 1970s.”

Despite geopolitical tensions and rising energy prices, Powell stressed that the U.S. economy continues to show resilience. Strong employment growth and steady consumer demand have supported economic activity, even as policymakers remain cautious about the risks emerging from global events.

“The U.S. economy is doing, you know, pretty well,” Powell said. “It’s just we don’t know what the effects of this will be, and really no one does.”

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