Powell is preparing for a possible farewell, so the Fed will likely hold rates at current levels.

Federal Reserve policymakers are expected to meet in Washington, D.C. this week for a meeting that may be Jerome Powell’s last as the head of the U.S. Central Bank. Energy prices remain high and the Iran War is at a standstill. This will likely prolong uncertainty regarding the outlook for economic and monetary policies. After a major obstacle was removed from the way, it now seems more likely that Powell's eight-year tenure at the Fed will end on May 15. Kevin Warsh's confirmation by the Senate as his successor was lifted on Friday. Powell is likely to oversee a vote on Wednesday by the Federal Open Market Committee, the policy-making body of the central bank, in order to keep the overnight benchmark interest rate at the same level it has held since December. Powell's presser after the meeting could resolve key issues, such as whether policymakers are willing to consider a rate hike later this year, if inflation increases. Powell's future on the Fed Board of Governors, even if Warsh gets confirmed in time for the next policy meeting scheduled in June, could also be discussed. The U.S. Department of Justice dropped on Friday a controversial criminal investigation of Powell regarding renovations of the Fed headquarters in Washington. This could satisfy the demands of an important Republican senator, who had threatened to delay Warsh’s confirmation due to it.

Powell had also made the end of the investigation a condition for leaving the Fed board. Powell, who has traditionally resigned his board seat when the leadership term of the U.S. Central Bank Chiefs expired, said last month that he would consider staying and "make this decision based on what is best for the organization and the people we are serving." This was a wider test related to President Donald Trump's attempts to encroach upon the Fed's autonomy.

Powell could be a Fed Governor until January 2028. This would be the last year of Trump’s presidency, and the long epilogue of the man Trump has nicknamed “too late” for not delivering the rate cuts that he wanted.

The current Fed head will be questioned on?his plan as well as the economic substance of a debate that is still clouded over by the U.S. - Iran war. Powell's conference will follow the FOMC's statement at 2 pm EDT (1800 GMT).

Central bankers warned that the impact of the war on economic growth and inflation would depend on the speed at which it was resolved and the oil price returning to its pre-war level, around $70 per barrel. Eight weeks after the war began, the bombing is paused, but economic warfare continues. The U.S. blocks Iranian ships from leaving Strait of Hormuz and?Iran prevents other vessels from crossing the vital waterway.

Brent crude futures - the benchmark for global oil - have increased by about 50% since the beginning of the war. Last month, the surge in energy and gasoline prices helped push up the U.S. Consumer Price Index by its largest increase in almost four years. The U.S. Central Bankers are expected to keep interest rates the same, but they will need to decide whether it is time to consider raising borrowing costs in case inflation continues to rise. Bond markets are positioned to keep the Fed's rate at its current level until at least 2027. The possibility of rate reductions has diminished. The longer energy prices are high and the Strait is constrained, then the more likely it is that higher inflation will be embedded in a variety of goods, services and supply chain effects. Real activity and employment may also begin to slow.

Waller stated that the Fed could be faced with a "very complex" situation, where it must deal with both high inflation and a weakening labour market. Waller stated that this dilemma could mean keeping?rates the same, but an increasing number his colleagues had already noted the possibility of rate hikes in their discussions during the March 17-18 meetings. This sparked a debate about whether the Fed's statement for this week would include language indicating that the Fed's rate change next could be either way, which would represent a significant shift. It was anticipated that the central bank would resume rate cuts this year. However, it has been on pause since December. Inflation is about a percentage above its 2% goal. Alberto Musalem, St. Louis Fed president, said that monetary policy is "in a good spot" and it would be appropriate to maintain policy at the current level for a while. Musalem, like other central bankers, said that an extended period of high crude oil prices would likely raise "core inflation" and not just the headline price of gasoline. "At that point, de-anchoring of inflation expectations will become relevant," he said. At the moment, inflation expectations are anchored in the medium- to long-term, but that will change, and it may be time to increase rates. Few U.S. policymakers would argue against the current rate hold at this time. Even their most vocal advocate of cheaper money, Fed governor Stephen Miran, said recently that he was considering slowing down his recommended pace of rate cuts due to the "less favorable" inflation outlook.

Powell's interpretation of the discussion and whether or not the Fed's statement on policy changes to include possible increases in borrowing costs is the open question.

Bank of America economists said in a recent note that the Fed would "stay firmly on hold" at its meeting in April. The Iran War has not abated the inflation risks. Labor data are improving. The question is whether or not the language of the statement that provides forward guidance will show that policy risks are both-sided. It's close, but we think it won’t. Powell will likely sound hawkish." (Reporting and editing by Dan Burns, Paul Simao and Howard Schneider)

(source: Reuters)