Key Points:
- The Federal Reserve kept its benchmark interest rate unchanged at 3.50%-3.75%.
- Fed Chair Jerome Powell warned that the ongoing US-Israeli war with Iran poses an uncertain threat to the economy.
- Officials still predict one interest rate cut this year, despite raising their inflation forecasts for 2026.
- Powell confirmed he will remain as acting chair if the Senate does not confirm his successor by mid-May.
The Federal Reserve decided to keep interest rates unchanged on Wednesday. This move surprised no one on Wall Street, but the central bank’s tone carried a serious warning. Officials noted that the escalating US-Israeli war with Iran creates a highly uncertain impact on the American economy.
Despite the chaos overseas, Fed officials are betting that the current disruptions in global energy markets will end quickly. However, Fed Chair Jerome Powell added a massive warning during his post-meeting press conference. He told reporters frankly that the central bank just does not know how the Middle East conflict will ultimately play out.
The central bank telegraphed its cautious view in two specific ways. In their brand new economic projections, officials still penciled in exactly one interest rate cut for this year. At the same time, they raised their inflation projections for 2026, though they expect those price pressures to slow down sharply in 2027.
Powell explained the strategy simply. He said the current forecast assumes the country will make progress on fighting inflation, even if that progress is slower than they originally hoped. He stressed that the rate forecast depends entirely on the economy’s actual performance. If inflation does not drop, the public will not see a rate cut this year.
The leadership of the Federal Reserve is also facing internal drama. Powell confirmed he might stick around longer than expected. President Donald Trump nominated former Fed Governor Kevin Warsh to serve as chairman in January. However, if the Senate fails to confirm Warsh by the time Powell’s current term expires in mid-May, Powell will stay in his role as acting chair until Congress finally approves the new leader.
A political standoff is causing this massive delay. Republican Senator Thom Tillis of North Carolina is actively blocking Warren’s nomination. Tillis demands that the Justice Department drop an ongoing investigation into Powell before he allows a vote. Meanwhile, DC US Attorney Jeanine Pirro, who leads the probe, signaled last week that she absolutely refuses to back down. Pirro is investigating testimony Powell gave to Congress last year regarding the massive renovation costs of the Fed’s headquarters in Washington, DC.
The official vote to leave the benchmark lending rate at 3.50%-3.75% was not unanimous. Governor Stephen Miran cast a dissenting vote, arguing for an immediate quarter-point rate cut. This marks a record-breaking streak of back-to-back dissents. Miran has voted against the majority on all five Fed decisions since he joined the monetary policy team last September, consistently pushing for lower rates.
The Federal Reserve previously lowered rates three times last year to help support a weakening job market. Now, officials admit the Middle East conflict is forcing them to pause and carefully measure the potential impact on inflation. While economists almost universally expect inflation to climb due to the war, no one knows how high prices will go or how long the fighting will last.
Powell also addressed fears of “stagflation,” a painful economic condition in which growth stalls while inflation remains high. Michael Pearce, the chief US economist at Oxford Economics, recently warned that the war in Iran poses a real stagflationary shock. However, Powell rejected that specific term. He noted that while the situation is difficult, the US economy looks nothing like the terrible economic crisis of the 1970s. The national unemployment rate was a low 4.4% in February, and the primary inflation gauge was 2.8% in January.
Still, the current path makes central bankers deeply uncomfortable. Powell admitted that the country has endured a massive tariff shock, a global pandemic, and now a sudden energy shock in just five years. He warned that this constant string of massive disruptions could eventually break the public’s trust and cause severe trouble for long-term inflation expectations.
