Federal Reserve Holds Benchmark Rate Steady, Warns of Dual Risks to Employment and Inflation from Iran War

Core Summary

• The Federal Reserve kept its key interest rate unchanged at Wednesday's meeting, but with four dissenting votes. Policymakers noted that the war with Iran has entered its third month, posing risks to inflation and employment.
• Chair Powell described the economy as "solid" in the statement and pointed to uncertainty from the war, with Brent crude futures rising to near four-year highs. Three dissenters did not support the easing bias included in the statement, while Governor Stephen Miran advocated for a 25-basis-point rate cut.
• "The economic outlook remains highly uncertain, and the conflict in the Middle East has intensified that uncertainty in the near term," Powell said at the post-meeting press conference. "Higher energy prices will push up headline inflation—beyond that, the scope and duration of the potential impact on the economy remain unclear." He added that policymakers "will continue to focus on risks to both sides of our dual mandate."

In-Depth Analysis

Powell said he will remain on the Board of Governors after his term as Fed Chair ends on May 15, to help ensure the Fed is shielded from political interference by the Trump administration. "The institution is under attack," he said, adding that "we have had to resort to the courts" to ensure monetary policy is implemented without political interference. He acknowledged: "We have been successful so far, but it is not over—none of this is settled."

Last week, after a court blocked subpoenas related to the investigation, the Justice Department paused its criminal probe into Powell's handling of the renovation of the Fed building. The investigation followed months of public criticism from President Trump, who said the Fed Chair should lower the benchmark interest rate to as low as 1%. "I will not leave the Board until the investigation is thoroughly concluded in a transparent and final manner," Powell said. "As a governor, I plan to keep a low profile," he added, and will decide later when to step down. His term on the Board runs until 2028.

Powell said policymakers retained an easing bias in the statement, even as consensus shifts toward a neutral stance, which gives equal weight to curbing inflation and avoiding a rise in unemployment. "The center is moving toward a more neutral position," he said, referring to the FOMC's consensus, "and the market is saying the same." He added: "Of course, if we wanted to raise rates, we would shift to a tightening bias, and before that, we would shift to a new neutral bias."

The war-driven surge in energy prices could push up inflation, slow economic growth, and raise unemployment, complicating the Fed's congressionally mandated mission of maintaining price stability and maximum employment. Uncertain whether to address inflation or unemployment, policymakers this year chose to keep the federal funds rate in a range of 3.5% to 3.75%. If central bank officials lower borrowing costs to boost the job market, they could also stimulate inflation, which has exceeded the Fed's 2% target for five years and has risen in recent months.

Since the U.S. and Israel launched strikes on Iran on February 28, energy prices have soared, with global benchmark Brent crude futures surging 63% from $73 to $119 per barrel. On the other side of the Fed's dual mandate, employment rose only slightly this month, following a decline in March, marking the worst two-month stretch for the job market since late 2024, according to S&P Global data. Powell said the economy has so far weathered the oil price shock with composure. "The economy has shown remarkable resilience over the years," he said, referring to how it has withstood supply disruptions from Russia's invasion of Ukraine, the pandemic, the highest tariffs since the 1930s, and the Iran war. "The U.S. economy has just weathered shock after shock, and consumers are still spending," he added.