The Federal Reserve on Wednesday maintained interest rates at their current levels, in line with expectations, while highlighting the “uncertain” effects on the US economy stemming from the US-Israeli conflict involving Iran. Fed officials remain optimistic that the disruptions in global energy markets will be temporary, though there is a significant caveat: “we just don’t know” how the situation will ultimately unfold, Chair Jerome Powell stated during a post-meeting news conference. Officials conveyed that perspective in two significant manners: In updated economic forecasts, they maintained the expectation of one rate cut this year. Federal Reserve officials have adjusted their forecasts, indicating an increase in inflation expectations for 2026, yet anticipate a significant decline in the subsequent year. “The forecast indicates that progress on inflation will be made, (but) not to the extent we had anticipated,” Powell stated. “The rate forecast hinges on economic performance; thus, without observable progress, a rate cut will not materialize.” Powell indicated that he might remain in his position to observe the situation unfold: If former Fed Governor Kevin Warsh, nominated by President Donald Trump for the Fed chair in January, is not confirmed by the time Powell’s term concludes in mid-May, he will continue in his role until Congress appoints a new Fed leader.
Republican Sen. Thom Tillis of North Carolina is the primary factor contributing to the delay. He has indicated that he will persist in obstructing the nomination unless the Justice Department ceases its investigation of Powell. DC US Attorney Jeanine Pirro, whose office is at the forefront of the investigation, indicated last week that she has no plans to pursue that course of action. Federal Reserve officials decided to maintain their benchmark lending rate within the range of 3.5%-3.75% for the second consecutive meeting. The Fed’s recent decision was not unanimous, as Governor Stephen Miran expressed dissent by voting for a quarter-point rate cut, highlighting the longest period of consecutive dissents since 2013. Miran has consistently opposed all five Fed decisions he has participated in since joining as a monetary policymaker in September, advocating for lower rates than the prevailing majority supports. The Federal Reserve reduced interest rates three times last year due to a declining labor market. However, officials have indicated in recent public addresses that the ongoing conflict in the Middle East is causing them to reconsider as they assess its possible effects on inflation. Analysts anticipate a rise in inflation; however, the magnitude is uncertain and will largely hinge on the scope and longevity of the conflict in Iran.
The Federal Reserve’s most recent policy statement recognized the tension affecting the global economy: “The implications of developments in the Middle East for the US economy are uncertain.” America’s rate setters find themselves in a challenging position as they contend with the dual pressures of rising inflation and a labor market that remains uncertain. Currently, the Fed is anticipated to remain on the sidelines and observe developments, at least until the next meeting in late April. Wall Street does not anticipate a rate cut this year, as the likelihood has diminished further following this morning’s inflation data, which indicated increasing price pressures at the wholesale level. For several months, Federal Reserve officials have consistently stated in their public addresses that the tariffs imposed by Trump are expected to lead to merely a one-time rise in the price level. Powell indicated that his colleagues share a similar perspective regarding the possible economic implications stemming from the conflict in Iran. However, he expressed a lack of confidence that this might be the situation. “I wouldn’t assert that there is a strong belief regarding the pace at which this will progress.” Powell stated “You have to write something down, and this is something that people wrote down,” regarding the forecasts indicating one rate cut in 2026 and inflation returning to more manageable levels in 2027.
Powell articulated that the perspective suggesting officials should disregard the impacts of tariffs and the oil shock is rooted in traditional thinking: “It is a one-time increase in the price of a good,” he stated. “Traditionally, there are consistent sentiments expressed regarding an energy-price spike.” However, following the Supreme Court’s decision to invalidate the majority of Trump’s tariffs and the recently implemented 15% global tariff, the timeline for when tariff inflation might reach its peak has become less certain. Chicago Fed President Austan Goolsbee indicated that the interconnected pricing pressures might pose a challenge for Fed officials. “We already had these big question marks,” Goolsbee told, explaining how the oil crisis is now complicating the assessment of tariff inflation. “It does align energy prices with the anticipated outcomes of tariffs,” he said. The upcoming Federal Reserve meeting in late April marks what is officially Powell’s final session as chair, though there exists a possibility that he could extend his tenure in the position for a while longer. “If my successor is not confirmed by the end of my term as chair, I would serve as chair pro tem until he is confirmed.” Powell stated “That is what the law calls for.” Last week, following Pirro’s announcement of her intention to appeal a judge’s ruling that dismissed the subpoenas her office issued to Powell, Tillis stated that he remains firm on his stance regarding the approval of Warsh. “Appealing the ruling will only prolong the confirmation process for Kevin Warsh as the next Fed Chair,” Tillis stated.
Pirro indicates that she is examining a segment of Powell’s testimony to Congress from the previous year concerning the expenses associated with the Federal Reserve’s continuous renovation of its headquarters in Washington, DC. Powell stated that he will remain on the board until the investigation reaches a conclusion. He is currently fulfilling a distinct, overlapping term on the Fed’s board that extends until 2028. Powell did not disclose his intentions regarding remaining in his position once his term as chair concludes. “I will make that decision based on what I believe is in the best interest of the institution and the individuals we serve,” he stated. Michael Pearce describes the Iran war as a “stagflationary shock.” This indicates that it has the potential to simultaneously dampen growth and fuel inflation. However, the current US economy is significantly different from the conditions experienced in the 1970s and early 1980s, a period marked by double-digit unemployment and inflation rates. The unemployment rate in February stood at a low 4.4%, while inflation, indicated by the Personal Consumption Expenditures price index, recorded a rate of 2.8% in January. Powell conveyed to reporters: “I would reserve the term stagflation for a much more serious set of circumstances.” That is not the current scenario we find ourselves in.
The current trajectory remains concerning for central bankers, who are responsible for addressing both of these challenges directly. The challenge lies in the Fed’s inability to effectively tackle both issues simultaneously. During the stagflation era under former Fed Chair Arthur Burns, officials increased interest rates to curb inflation, subsequently pausing to invigorate economic growth. The stop-and-go strategy ultimately emerged as a significant factor in maintaining persistent inflation levels. Last year, as both aspects of the Fed’s mandate faced challenges, Powell indicated that officials would prioritize addressing the most pressing issue first. “It has been five years and we faced the tariff shock, the pandemic, and now we are experiencing an energy shock of considerable size and duration. We don’t know what that will be,” Powell stated. “Concerns arise that this type of situation could disrupt inflation expectations.” He added “That is a significant concern for us.”