Fed holds rates steady as war in Iran clouds outlook

The Federal Reserve on Wednesday left interest rates unchanged for its second straight meeting, ignoring President Donald Trump’s demands for cuts as the war with Iran has fueled a rise in the price of oil that threatens to reignite inflation.

“In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy,” Fed Chair Jerome H. Powell told reporters in a news conference on Wednesday, following the announcement on interest rates.

Twelve Fed officials tentatively penciled in at least one rate cut later this year, though seven of the 19 meeting participants signaled no additional cuts. One Fed official, former White House economic adviser Stephen Miran, dissented from Wednesday’s decision to hold rates steady.

Separately, Powell told reporters that he would continue to serve as Fed chief if his designated successor, Kevin Warsh, isn’t confirmed by the time Powell’s tenure as chair expires in mid-May. “That is what the law calls for,” he said.

Sen. Thom Tillis (North Carolina), a key Republican member of the Senate Banking Committee, has said he will not allow Warsh’s nomination to advance until the conclusion of a Justice Department probe into Powell. A federal judge last week quashed a pair of subpoenas issued to the Fed, but the Justice Department is appealing the decision.

Indeed, Powell could elect to stay through early 2028 as one of seven members of the Fed’s Board of Governors, depriving the White House of a crucial seat on the board. The Fed chief said he had no plans to leave the board until after the Justice Department probe is “well and truly over.”

The Fed cut rates three times at the end of 2025, with policymakers signaling patience as they watch whether inflation continues to cool. Now, the war threatens to pull the Fed in two directions: Rising oil prices could rekindle inflation, complicating the central bank’s efforts to bring price growth to heel – while the broader economic uncertainty unleashed by the war could slow growth and nudge unemployment higher.

That tension puts the Fed’s dual mandate – for low and stable inflation along with plentiful jobs – potentially in direct conflict. The upshot: The Fed is likely to extend its wait-and-see approach, analysts say.

Fed policies influence what households and businesses pay for mortgages, credit cards and other loans, and investors are watching closely for guidance on the central bank’s next steps.

Rising energy and transportation costs are likely to intensify pressure on the Trump administration, which has made tackling high prices and affordability a central political goal. The Fed’s unwillingness to cut rates hands the White House a convenient target, even as economists say the central bank has little choice but to wait. A survey of 28 former Federal Reserve officials and staff members, conducted by Duke University this month, found that most of the former insiders believed the central bank would either need to keep rates steady or even raise them this year. Only a quarter of the 28 thought a rate cut would be appropriate.

“Where is the Federal Reserve Chairman, Jerome ‘Too Late’ Powell, today?” Trump wrote on his social media site last week. “He should be dropping interest rates, IMMEDIATELY, not waiting for the next meeting!”

Trump’s efforts to pressure the Fed extend beyond social media posts. He is seeking to fire Lisa Cook, a sitting Fed governor, though the Supreme Court signaled it will probably allow her to remain on the seven-member Fed board while she challenges the dismissal. Separately, the Justice Department launched a probe of Powell over testimony he gave in the summer related to a $2.5 billion renovation of the Fed’s Washington headquarters. A federal judge quashed a pair of subpoenas tied to the investigation last week, ruling the inquiry lacked merit. The Justice Department said it would appeal.

“A mountain of evidence suggests that the Government served these subpoenas on the Board to pressure its Chair into voting for lower interest rates or resigning,” Chief U.S. District Judge James E. Boasberg in D.C. wrote in the opinion.

While price pressures have cooled markedly since their 2022 peak, inflation has remained stubbornly elevated for five consecutive years. Economists say it is actually running closer to 3 percent – about a percentage point above the Federal Reserve’s preferred target.

Ahead of the meeting, many analysts said they anticipated just one additional rate cut later this year, followed by another cut sometime in 2027.

Fed officials may be worried about the effects of the Iran conflict, because a rapid rise in energy prices can raise fears among consumers of higher prices across the broader economy – a dynamic that, if left unchecked, can become self-fulfilling, economists say.

“Everyone is going to see inflation at the gas pump, and they’ll extrapolate from that to the general price level,” said Phillip Braun, a clinical professor of finance at the Kellogg School of Management at Northwestern University.

So far, longer-term inflation expectations have remained relatively stable. But the Fed is watching closely.

Those concerns are playing out against an uncomfortable backdrop: The Fed’s preferred benchmark for inflation showed that underlying inflation remained stubbornly high in January. That price index rose 2.8 percent over the previous year, a slight decline from December but still well above the Fed’s 2 percent target. More concerning to some economists is that the benchmark that strips out volatile food and energy prices – and is closely watched as a measure of underlying price trends – rose to 3.1 percent in January from 3 percent in December.