BY EMMANUEL OGBONNA
Federal Reserve Chair Jerome Powell warned Monday that policymakers must remain alert to inflation risks as rising energy prices linked to the Iran conflict begin to ripple through the U.S. economy, even as he acknowledged the limits of monetary policy in responding to such shocks.
Speaking before hundreds of students at Harvard University, Powell addressed growing concerns about the economic fallout from geopolitical instability, noting that gasoline prices have climbed steadily and are nearing an average of $4 per gallon nationwide. The increase, driven largely by disruptions in global energy markets, has added a new layer of complexity to the Federal Reserve’s ongoing effort to maintain price stability.
Powell emphasized that while energy-driven inflation tends to be volatile and often temporary, the central bank cannot afford to ignore the broader psychological and economic effects that repeated price shocks may have on households and businesses. He explained that inflation expectations — a key factor in long-term economic stability — could become unanchored if consumers and firms begin to assume that higher prices are here to stay.
“You have to carefully monitor inflation expectations,” Powell said, outlining the risk that a sequence of supply shocks could gradually shift public perception. If businesses and consumers begin pricing in higher inflation as a baseline, he suggested, it could create a self-reinforcing cycle that becomes more difficult to control through traditional policy tools.
Despite these concerns, Powell made clear that the Federal Reserve’s ability to respond directly to energy price spikes is inherently constrained. Interest rate adjustments, the Fed’s primary mechanism for influencing economic conditions, operate with a lag and are better suited to addressing demand-driven inflation rather than sudden supply disruptions such as those caused by geopolitical conflict.
In addition to inflation, Powell turned his attention to the state of the labor market, offering a candid assessment that underscored the challenges facing new entrants to the workforce. While unemployment remains relatively low by historical standards, hiring activity has slowed significantly, creating what economists often describe as a “low-hire, low-fire” environment. Companies, he noted, are reluctant to expand their workforce but are also hesitant to lay off existing employees, resulting in limited opportunities for job seekers — particularly younger graduates.
Recent labor data reflects this stagnation. Throughout much of the past year, monthly job growth has remained subdued, with hiring levels among the weakest seen outside of recessionary periods in decades. Although there was a brief uptick at the start of the year, momentum quickly reversed, reinforcing concerns that the labor market may be entering a prolonged period of sluggish expansion.
Powell also pointed to the growing influence of artificial intelligence as a structural factor reshaping employment dynamics. He acknowledged that emerging technologies, particularly advanced language models, are beginning to alter the nature of entry-level work, potentially displacing roles that have traditionally served as a gateway for young professionals. At the same time, uncertainty about how best to integrate these tools into business operations has led some companies to delay hiring decisions altogether.
Even so, Powell struck a cautiously optimistic tone about the long-term trajectory of the economy. Drawing on historical precedent, he argued that technological innovation has consistently led to higher productivity and improved living standards over time. He encouraged students to invest in developing skills that align with these evolving technologies, suggesting that adaptability will be critical in navigating the changing economic landscape.
“There’s no denying it’s a challenging time to enter the labor market,” he said, while urging patience and a forward-looking perspective. Over the longer term, he added, the U.S. economy is likely to continue generating opportunities, particularly for those who are able to harness new tools effectively.
In a wide-ranging discussion that touched on institutional integrity, Powell also reaffirmed the importance of maintaining the Federal Reserve’s independence from political pressure. Without directly referencing Donald Trump, he highlighted the difficulty of building strong democratic institutions and the relative ease with which they can be undermined, a remark widely interpreted as a defense of the central bank’s autonomy.
Tensions between the White House and the Federal Reserve have intensified in recent months, as Trump has repeatedly called for interest rate cuts to lower borrowing costs and stimulate economic activity. The administration’s broader economic policies — including the imposition of new tariffs on trading partners — have further complicated the Fed’s dual mandate of controlling inflation while promoting maximum employment.
Compounding these challenges, the ongoing Iran conflict has pushed energy prices higher, adding to inflationary pressures at a time when policymakers are already navigating a delicate balance. Data from AAA showed that the national average price of gasoline has climbed sharply, underscoring the immediate impact on consumers.
Meanwhile, political developments have added another layer of uncertainty to the Fed’s leadership outlook. Trump has nominated Kevin Warsh as a potential successor to Powell, though the confirmation process has been delayed amid a Justice Department investigation. The situation has drawn scrutiny from lawmakers, including Thom Tillis, who has indicated he will not support any Federal Reserve nominees until the matter is resolved.
Without naming his prospective successor, Powell offered pointed advice on the responsibilities of the role, stressing the importance of remaining focused on the central bank’s core objectives. He cautioned against the temptation to use the Fed’s powerful policy tools for purposes beyond its mandate, noting that such deviations could undermine both credibility and effectiveness.
“We have very powerful tools,” Powell said. “They’re supposed to be for maximum employment and price stability and financial stability.” He added that while political leaders may at times seek to leverage those tools for other goals, the Federal Reserve must remain disciplined in adhering to its defined mission.
As global tensions persist and economic signals remain mixed, Powell’s remarks highlighted the increasingly complex environment facing U.S. policymakers — one shaped not only by domestic conditions, but also by geopolitical risks and rapid technological change.
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