After the first Federal Open Market Committee (FOMC) meeting of 2025, Jay Powell paused to consider the past and prospective paths for the US Federal Reserve (the Fed). Early in 2025, Powell was pleased that the US economy and Fed policy seemed well positioned. Inflation, after spiking in 2021/22, was coming back toward the Fed’s 2% target, long-term inflation expectations remained well anchored, labor market conditions were solid, and the Fed’s balance sheet had been shrinking in a measured and well-telegraphed manner. But Powell knew that, as always, the Fed might have to contend with various shocks. The Q&A from financial journalists at the January post-FOMC press conference highlighted a number of possible ones, including pressure from the White House to loosen monetary policy and the effects on inflation from fiscal policy as well as policies on tariffs and immigration.

All of these—the state of the US economy, the shocks that can be both unpredictable and prevalent and how the Fed responds—will impact the path of US long-term interest rates, arguably the most important price in the US (and the world).

This case was written as an updated version of “Fed Listens Meets an Inflation Surge” (UVA-GEM-0210) and may be used in its place. It is taught at Darden in the first-year program elective, “Global Financial Markets.” It would also be suitable for any macro or international macroeconomics course.