Federal Reserve holds interest rates steady amid Iran war, mixed economic signals

The Federal Reserve held interest rates steady Wednesday as the war in Iran and conflicting economic signals continued to throw snags in the path to rate cuts, while Fed Chair Jerome Powell said he would stay on until his successor is confirmed.

The central bank – which voted 11-1 to keep rates between 3.5% and 3.75% – nodded to uncertainty around the Middle East conflict, with Powell joking that if there was ever a meeting to skip economic projections, “this would be a good one, because we just don’t know.”

Most policymakers kept their predictions for the year the same, with the closely-watched “dot plot” showing one rate cut this year and another in 2027.

But the Fed remained highly divided, with seven of the committee’s 19 members signaling they do not expect any rate cuts this year – one more person compared to the last update in December.

The Dow Jones had plunged 768 points, or 1.6%, while the S&P 500 and Nasdaq also fell more than 1%.

Powell signaled the economy could be strong enough to withstand further pressure after “doing pretty well through a lot of significant challenges” – adding that slow job growth is partially due to the country’s immigration crackdown, while tariffs and the pandemic have hit inflation.

“We had the tariff shock, we had the pandemic and now we have an energy shock of some size and duration,” he said at a news conference. “You worry that’s the kind of thing that can cause trouble for inflation expectations.”

The projections suggest the Fed “will aim to ‘look through’ the current oil-spike induced inflation increase,” Stephen Coltman, head of macro at 21shares, wrote in a Wednesday note.

Policymakers typically look past energy shocks, but Iran’s blockade of the Strait of Hormuz has sent oil prices above $100 a barrel and caused the most severe energy supply disruption ever – raising fears that a prolonged conflict could reheat stubborn inflation.

Fed officials have been split on their views of the economy, with some arguing that they are willing to lower rates further after three reductions last year to support the labor market. Others want to hold off over concerns that inflation could spike.

Governor Stephen Miran again dissented on Wednesday’s decision, voting in favor of a quarter-point cut. Governor Christopher Waller, who earlier this year also voted for a cut, this time agreed with the decision to hold.

The personal consumption expenditures index – the Fed’s preferred inflation gauge – showed that prices were persistently elevated in February, even before the US and Israel’s joint air strikes on Iran began Feb. 28, according to Commerce Department data released last week.

Meanwhile, updated government estimates showed the US economy grew at a surprisingly sluggish 0.7% pace from October through December – reigniting fears that inflation and flat growth could create a toxic mix known as “stagflation.”

Adding to the noise was a particularly weak jobs report earlier this month, which showed the US lost 92,000 jobs in February while the unemployment rate ticked up to 4.4%.

Powell rejected the threat of stagflation, arguing that there is “some tension” between the goals of low inflation and high employment, but “it’s nothing like what they faced in the 1970s.”

“I would reserve the term stagflation for a much more serious set of circumstances,” he said during the press briefing.

Wednesday marks Jerome Powell’s second-to-last meeting as chairman, after months of President Trump angrily pressuring the central bank to slash interest rates more quickly.

Kevin Warsh – Trump’s nominee to replace Powell once his term ends in May – is facing a battle in Congress as Sen. Thom Tillis (R-NC) vows to block his nomination until the government ends its criminal investigation into Powell over the Fed’s over-budget headquarters renovation.

If a successor is not confirmed by May 15, Powell said he will stay on as “chairman protem” until he is approved, adding that it’s “what the law calls for.”

He also said he plans to remain on the board until the investigation is “well and truly over” – though he has not yet made a decision on whether to remain after Warsh steps into the chairman seat. Powell could serve as a governor through 2028.