Fed expected to keep rates steady under uncertainty of war

The Federal Reserve will announce its latest interest rate decision Wednesday. The last time the Fed changed the federal funds rate was in December. Then, we got a pause in January.

This time around, between elevated inflation and a shaky job market, the Federal Reserve is setting the stage for another interest rate hold.

Former Fed governor Randy Kroszner said the war in the Middle East basically cemented the hold — here in the U.S. and around the world.

“Almost every major central bank is having a meeting this week and I think almost all of them are going to stay on hold,” he said.

Uncertainty forces economies to stop, observe, and recalibrate, said former Fed adviser Ellen Meade.

“If an oil shock or something very similar to it is short lived, probably the best thing a central bank can do is just wait,” she said.

Wait to see how long the war lasts. And wait to see how deeply oil prices affect other prices.

Because, Meade said, expensive oil is “a stagflationary shock.”

Pricey gas could make consumers pull back on other spending, which would slow down the economy. Pricey gas could also make goods more expensive and push inflation up.

Usually, central bankers write this kind of shock off as a one-time thing — as transitory.

“That language has sort of been tarred and feathered, I think, by the experience during the pandemic,” Meade said.

Back then the Fed insisted inflation was transitory, but it ended up peaking above 9% and still hasn’t come all the way down to the target rate of 2%.

David Wessel, a senior fellow at the Brookings Institution, said the Fed has to use different messaging this time.

“They can’t count on people being so calm about inflation because we’ve had inflation in recent memory,” he said.

If people already believe inflation is likely, it could drive more inflation. Wessel said that possibility is enough for the Fed to be more hesitant than usual about cutting rates in the coming months.