U.S. Fed holds interest rates again as Iran war creates inflation worries

In a statement announcing the 3.6% rate hold, the central bank said that the 'implications of developments in the Middle East for the U.S. economy are uncertain.'

U.S. Federal Reserve officials expect the Iran war will worsen inflation this year while having little impact on economic growth, but they still expect to cut their key rate once in 2026.

For now, Fed policymakers left short-term interest rates unchanged Wednesday for the second straight meeting at about 3.6%. In a statement, the central bank said that the “implications of developments in the Middle East for the U.S. economy are uncertain.”

Still, by keeping their forecast for a rate cut this year and next — the same projections that they made in December — central bank policymakers appear to expect the gas price spike from the Iran war to have a largely temporary effect on inflation and the economy. Policymakers also foresee unemployment remaining unchanged by the end of this year, a more optimistic outlook than most outside economists.

Whether that turns out to be true will largely depend on the length of the conflict in the Middle East. The officials expect inflation to fall back to 2.2% in 2027 and hit the Fed’s 2% target in 2028.

Speaking to reporters after the rate decision was announced, Powell said that in the short-term, higher oil and gas prices will elevate inflation, but it is too soon to know the potential impacts on the economy.

“The U.S. economy is doing pretty well, it’s just we don’t know what the effects of this will be, and really no one does,” Powell said.

When asked about an ongoing investigation by the Justice Department into building renovations at the Fed, Powell said that he has “no intention” of leaving the central bank until the investigation is over. Last Friday, a judge threw out a pair of subpoenas that the Justice Department had issued to the Fed, dealing a blow to the investigation. But U.S. Attorney Jeannine Pirro has said she will appeal the ruling.

Powell’s term as Fed chair is scheduled to end on May 15, and President Donald Trump has nominated a former top Fed official, Kevin Warsh, to replace Powell as chair. Warsh’s nomination has been delayed in the Senate because key Republican senators are opposed to the DOJ investigation.