Federal Reserve Chair Jerome Powell is at Cambridge for a moderated discussion with Harvard University's introductory Principles of Economics Class, an academic engagement that comes at a charged moment for the central bank.

Powell says he welcomes disagreements at the Fed. “I think it helps us make better decisions,” he says.

“Confidence is what you feel before you really understand the problem,” Powell says as he makes the point that dissent on the FOMC isn’t really a concern, so long as that is based on a “thoughtful” underlying judgment.

Powell is talking about how the economic environment is difficult for Fed officials right now. Hiring is low, potentially putting a bit of pressure on the labor market, and at the same time, inflation is still above the Fed’s 2% goal. Those two issues would require opposite policies — lower rates to help bolster the labor market but higher rates to bring down inflation. The Fed has tried to navigate this by lowering rates a bit as inflation cooled, but now holding them steady to see if price pressures abate a bit more.

Unsurprisingly, Powell gave a full-throated defense of QE. “There’s an oceanic quantity of research on this, and overall it tends to find that that buying long-term assets does does lower interest rates and does provide some support for economic activity.”

There’s no “accepted answer” on the macroeconomic effect of quantitative easing, Powell says. He adds thathe’s in the camp of those seeing positive economic effects, but says it’s “hard to quantify.” “We haven’t really seen the downside risks” of QE, such as sparking inflation, he says.

Powell notes no Treasury Department has yet told the Fed to stop QE because “you’re supporting the economy too much.” That said, Treasury Secretary Scott Bessent has repeatedly faulted the Fed for excessive QE both after the global financial crisis and after Covid.

“The FOMC is and will continue to be committed to getting inflation back to 2% on a sustained basis,” Powell says.

Powell has always emphatically said that inflation will reach the Fed’s 2% target, but it has been a long and often frustrating journey. It came close at the end of 2024, Powell notes, but tariffs are adding a half or full percentage point to inflation right now, and the war in Iran could further complicate the cooling.

Earlier this month in his press conference, Powell had said that tariffs were adding “between half and three quarters” of a percentage point to core inflation. So his upper-end estimate today of 1 percentage point is slightly higher.

Powell says there’s a tendency to look though supply shocks, but the critical variable is inflation expectations.

Powell is explaining that the Fed’s main tool — controlling interest rates — really only has an impact on demand, not supply. The rise in oil prices with the Iran war is a supply shock. But there could be an impact on inflation expectations, which the Fed is very attuned to as it can impact demand behavior.

“You have to carefully monitor inflation expectations because you can have a series of these supply shocks and that can lead the public generally — businesses, price setters, households — lead them to start expecting higher inflation over time,” Powell says.

He again says it’s too soon to know how the Iran war will impact the economy (via energy prices). “We don’t know what what the economic effects will be.”

Powell notes: “Our oversight, by the way, is Congress, not the administration.”

“Any chair needs to let the vice chair for supervision take the lead on those issues,” Powell says.

Powell is carefully making it clear that the Fed’s role in banking supervision is “a little bit different” to it’s role in monetary policymaking given the vice chair for supervision was a direct creation of the Dodd-Frank Act.

Powell is asked whether he’s worried that another financial crisis is around the corner.

“The real thing, though, is the financial sector is just always evolving rapidly,” Powell says. “Vigilance is what you need. You just need to always know that there’s another thing coming.”

“We’re in the levee-building business not the hurricane prevention business,” Powell says. “Hurricanes — they’re going to come and you just have to assume you won’t know what direction of what the nature of it will be. So you want highly resilient financial system, and we have that.”

After a long and winding question on whether or not Powell is worried about a looming financial crisis, the Fed chair responds with an equally meandering answer that basically says the financial system today is stronger than it was.

Interestingly, he highlighted the danger of a cyber attack before he got to private credit, which he described as a relatively small part of the asset pool (though the Fed is watching it “super carefully.”)

Powell bats away a question on regrets and says he doesn’t focus on that.

“I would only give advice if asked, and I would do it privately” Powell says when asked on what advice he would give to the next Fed chair. But then he goes on to offer the following advice in public:

“It is very, very important to stick to your knitting and to stick to the things that were actually assigned. And there’s, there’s always a temptation to want to move into other areas. And I think we have very powerful tools. They’re supposed to be for maximum employment and price stability and financial stability. There’s always a time when an administration looks and says, it would be good to use that tool for something else. What if we were just to like and call that like? That’s part of the mandate. Happens all the time, and we just have to be in a situation where we’re not trying to work against any politician or any administration, but we have to be careful to stick to what we’re doing.”

Powell is now talking about the labor market for young people, which is tough right now.

The unemployment rate for 20- to 24-year-olds is at 7.4%, after topped 9% last year. But Powell says the US economy is very dynamic and that he’s optimistic about the medium and longer term, even if the economy is currently going through some structural changes with AI and other innovations.

“There’s no denying it’s a challenging time to enter the labor market, but it may take some patience and all that but in the longer term, this economy is going to give you great opportunities,” Powell says to the students in the audience.