Federal Reserve holds interest rates steady, citing elevated economic uncertainty

The Federal Reserve left its benchmark interest rate unchanged on Wednesday, marking the central bank’s second consecutive pause in 2026. In its policy statement, the Fed said economic uncertainty in the United States remained high, adding that the impact of the war in Iran also remains unclear.

The Fed kept the federal funds rate — which banks charge each other for short-term loans — at its current range of 3.5% to 3.75%. The decision to keep rates stable was widely expected by investors.

Rate cuts still on the table?

Fed officials said they still plan to cut their key rate once in 2026, the same projection as in December. By maintaining their forecast for a rate cut this year and next, policymakers appear to expect the surge in energy prices caused by the war in Iran to have a transitory effect on inflation and the economy.

The central bank faces a darker economic outlook for the United States, with Iranian War provoking energy prices will rise and threatens to drive up inflation. Before the war began on Feb. 28, economists had predicted the next rate cut for the Fed’s June meeting, but the likelihood of that happening is now considered slim, according to CME FedWatch, which monitors trader sentiment.

“The Fed is choosing to look through the fog of conflict, for now. A dual-mandate Federal Reserve will not move interest rates during a supply shock,” Jamie Cox, managing partner of Harris Financial Group, said in an email after the Fed’s decision.

Maintaining the projection for further reduction in 2026 is a “positive note,” Matt Stucky, chief equity portfolio manager at Northwestern Mutual, said in an email. He added: “The Fed appears willing to tolerate some ‘transitory’ energy inflation and resume cuts later in the year.”

Inflation expected to increase

The Fed, which also released new economic forecasts on Wednesday, said it now expects slightly higher inflation this year than in its last projections in December. Officials now expect inflation to reach an annual rate of 2.7% by the end of 2026, up from its previous estimate of 2.4%.

Fed officials expect core inflation, which excludes volatile food and energy costs, to also finish the year at 2.7%, up from a previous forecast of 2.5%.

At a news conference Wednesday afternoon to discuss the rate decision, Fed Chairman Jerome Powell stressed that the economic consequences of the war in Iran remain uncertain, including the impact on consumers, who now face sharply rising gas prices and may potentially cut back spending in other areas.

“What I want to emphasize is that no one knows,” Powell said. “If we experience a long period of much higher gas prices, that will weigh on consumption, but we don’t know if that will happen.”

Signals suggest inflation remained stable even before the war in Iran sent energy prices higher this month. On Wednesday, the Labor Department announced that its producer price index, which measures inflation before it reaches consumers, rose 3.4% in February on an annual basis. This increase – the largest in a year – was stronger than economists expected.

“This is not the kind of PPI report the Fed wants to see,” Nationwide Financial Markets economist Oren Klachkin said in an email. “This report suggests that inflation was going to accelerate even before the Iranian conflict broke out.”

At the same time, the labor market is also facing headwinds. United States 92,000 job cuts in Februarya brutal and unexpected setback when economists predicted a gain of 60,000 jobs.

Powell’s outlook

During his press conference, Powell noted that the economy had weathered recent headwinds with resilience, and added that he believed the economy was “doing pretty well,” despite uncertainty around inflation, the war in Iran and the job market.

Powell added that he intended to remain on the Fed’s board of governors until a Department of Justice investigation is resolved. Powell’s term as Fed chair ends in May, but he can remain a member of the FOMC until January 2028.

“I have no intention of leaving the board until the investigation is completely complete,” he said.

Last week, a judge quashed two grand jury subpoenas sent to the Fed as part of a criminal investigation into building renovations by U.S. Attorney Jeanine Pirro’s office, saying it was a pretext to pressure Powell into supporting an interest rate cut or resigning. Pirro said she would appeal the decision.

President Trump has repeatedly called on Powell to cut rates, a sentiment he expressed again Wednesday in a social media post asking, “When is Powell ‘too late’ to cut interest rates?”

In January, Mr. Trump appointed a former Fed official Kevin Warsh to replace PowellI am president. Warsh still needs Senate confirmation to take on the role, and Sen. Thom Tillis, a North Carolina Republican who serves on the Senate Banking Committee, has said he will do so. oppose any candidate for the Fed while the DOJ continues its investigation.

If his successor is not confirmed before his term ends in May, Powell said he would serve as interim president until Warsh can assume that role.

“That’s what the law requires,” he said.