The Fed is facing a whole new fight

Staring down an escalating war, soaring oil prices, and inflation that refuses to quit, the Federal Reserve kept interest rates parked between 3.5% and 3.75%.

This is the Fed’s second consecutive call to hold rates steady, a decision that was widely anticipated amid growing concerns over how the Iran war could ripple through the US economy.

“The implications of events in the Middle East for the US economy are uncertain,” chair Jerome Powell said during today’s press conference. “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.”

Oil shocks generally don’t rattle the Fed, which tends to look past them as temporary disruptions. But the bigger-picture concern is how long inflation has outpaced the Fed’s 2% goal. As Powell pointed out, “It’s been five years now of inflation above target.”

The Fed’s new balancing act

This Fed decision, like the last one, was not unanimous. Among the twelve voting FOMC members, only Stephen Miran (appointed by President Trump in 2025) pushed for a quarter-point cut. As for what lies ahead, the Fed’s Summary of Economic Projections (aka the Dot Plot) shows central bankers expect one quarter-point rate cut for the rest of the year, followed by two quarter-point cuts in 2027—unchanged from the last Dot Plot in December.

Still, it’s worth keeping in mind that many of the economic reports the Fed relies on for its decision-making were released before the Iran conflict began. As a result, the war’s impact has yet to fully show up in the data. But even pre-Iran, the state of the economy had already raised some red flags.

Just this morning the Producer Price Index measuring US wholesale inflation in February unexpectedly rose by 3.4% annually, the highest spike since February 2015. Core PPI, which excludes food, energy, and trade services, rose 3.9%. Both numbers suggest that business costs are rising, which may be passed along to consumers via higher prices.

A murky future

The Fed’s own economic projections were a mixed bag. Although their unemployment forecast for 2026 remained unchanged at 4.4%, officials now expect slightly healthier economic growth, with GDP expected to climb 2.4% this year versus a 2.3% forecast in December. Meanwhile, their outlook on headline inflation rose from 2.4% to 2.7%, and core inflation forecasts also ticked up to 2.7%.

Long story short: The Fed sees economic growth holding up, unemployment staying steady, but inflation inching higher.

Meanwhile, Fed drama is still afoot. This was Powell’s second-to-last meeting as chair of the Federal Reserve before his term ends on May 15. Although President Trump tapped Kevin Warsh to fill this role, Republican Senator Thom Tillis has vowed to block that nomination until the Justice Department calls off its criminal investigation into Powell—a move widely seen as a brazen pressure campaign.

So what happens if Warsh’s confirmation remains in limbo by the Fed’s next meeting on June 16 and 17? Powell said in his press conference that the law states he would stay on as chair pro tem until a successor is installed.

That decision, much like today’s call to keep rates steady, is sure to garner a strong reaction from the White House.—JD