The Fed holds interest rates steady as the Iran war complicates the inflation outlook

The Federal Reserve on Wednesday kept its benchmark interest rate at a range of 3.5% to 3.75%, marking the second consecutive meeting in which monetary policymakers left rates unchanged.

The decision by the Federal Open Market Committee came as the central bank weighs conflicting pressures: inflation that has run above its 2% target for five years and is now being pushed higher by energy costs from the Iran war, alongside a labor market that has sent mixed signals, with a relatively strong January jobs report followed by a weaker February.

"While job gains have remained low, the unemployment rate has been little changed in recent months, and inflation remains somewhat elevated," Fed Chair Jerome Powell said in a news conference Wednesday. "The implications of developments in the Middle East for the U.S. economy are uncertain."

The rate decision follows a wholesale inflation reading that came in well above forecasts, prompting futures markets to move any expected rate cut to December at the earliest. Odds of a reduction at the December meeting fell to about 60%, according to CNBC. The shift is significant: As recently as before Feb. 28, markets had fully priced in rate reductions at the June and September meetings. Economists surveyed by Bloomberg expect officials to pencil in two quarter-point rate cuts for 2026, up from the single cut projected in December.

"Whenever you have the Fed's dual mandate become a dueling mandate, there should be debate," said Diane Swonk, chief economist at KPMG, according to Bloomberg. "The reality is that we don't have the luxury of other central banks of just looking through the inflation, given that we're five years in and the risks of it becoming more entrenched rise by the day."

None of the recently released inflation data released so far captures price increases tied to the war, which has snarled the critical Strait of Hormuz and rattled global energy markets. Brent crude topped $108 a barrel Wednesday morning after Israel struck Iranian gas infrastructure.

"Near term measures of inflation expectations have risen in recent weeks," Powell said, "likely reflecting the substantial rise in oil prices caused by the supply disruptions in the Middle East."

Fed Governor Stephen Miran, who has voted for rate cuts at every meeting since joining the central bank as an appointment of President Donald Trump in September, did so again by dissenting from Wednesday's decision.

Trump has repeatedly pushed the central bank to slash borrowing costs and has waged a fierce pressure campaign against Powell.