Key Takeaways

  • The Federal Reserve kept its key interest rate unchanged at Wednesday's decision, but one committee member dissented. The Iran war pushed oil prices to near four-year highs, and the Fed warned of uncertain economic effects.
  • The median projection of Fed officials shows one 25-basis-point rate cut in 2026, consistent with the December forecast. They expect core PCE inflation to be 2.7% by the end of 2026, up 0.2 percentage points from the December projection. Economic growth forecasts were raised from 2.3% to 2.4%, while the unemployment rate forecast remained unchanged at 4.4%.
  • Fed Chair Powell said at the press conference: "The impact of Middle East events on the U.S. economy is uncertain. In the near term, higher energy prices will push up overall inflation, but it is too early to judge the scope and duration of the potential impact on the economy."

In-Depth Analysis

Since the March 18 policy meeting, Fed policymakers have been trying to fine-tune borrowing costs amid the dual risks of rising unemployment and accelerating inflation. The key interest rate range remained unchanged at 3.5% to 3.75%.

The surge in energy prices triggered by the Iran war this month has intensified the central bank's policy dilemma, potentially pushing up inflation, slowing economic growth, and raising unemployment. Powell said, referring to the Fed's dual mandate of stable prices and maximum employment: "It's hard to say which risk is greater." He acknowledged: "We are in a difficult situation," noting that the current challenge lies in balancing the two sides of the mandate.

Powell said: "We feel we are right at the boundary between restrictive and non-restrictive, and we lean toward maintaining current borrowing costs rather than lowering them." He believes "this is the right stance."

Since hostilities resumed between Iran and the United States and Israel on February 28, global benchmark Brent crude futures have surged about 48%, from $73 to $108 per barrel. Meanwhile, according to AAA data, the average price of regular gasoline in the United States has risen 31% over the past month.

Before the U.S. and Israeli airstrikes on Iran, inflation was already rising and had remained above the Fed's 2% target for five years. Core PCE—the Fed's preferred measure of price pressures—rose 3.1% year over year in January, up from 3% in December.

Powell said Fed officials look forward to seeing goods prices decline, as the highest U.S. tariffs since the 1930s will pass through to the economy by midyear. He said: "What really matters this year is progress on inflation, namely that goods inflation declines after the one-time impact of tariffs on prices fades." He added: "That's where our focus is," but recent inflation data shows "we have not made progress yet."

Powell noted that for five years, the Fed has been trying to bring inflation down to its 2% target amid shocks such as Russia's invasion of Ukraine, U.S. tariff increases, and the recent surge in oil prices due to the Iran conflict. He said: "This is a series of repeated events," adding, "You worry that such events could affect inflation expectations, and we are very concerned about that." He stressed: "We are firmly committed to taking all necessary measures to anchor inflation expectations at 2%."

Like inflation, the labor market has also deviated from the Fed's dual mandate in recent months. At the January FOMC meeting, when rates were held steady, two policymakers dissented. On Wednesday, Fed Governor Stephen Miran again dissented, advocating for a 25-basis-point rate cut.

The economy unexpectedly lost 92,000 jobs in February, and the unemployment rate rose 0.1 percentage point to 4.4%. Job losses spanned all industries, including manufacturing, warehousing, transportation, and healthcare.

Powell said he intends to serve as interim chair if his successor is not confirmed by the Senate before his term expires in May. After the new chair is confirmed, Powell will continue to serve as a Fed governor until the Justice Department concludes its investigation into the central bank's headquarters renovation project. Powell said he has not decided whether to complete his term as governor after the investigation ends; his term runs until January 2028.