(WBAP/KLIF) — WASHINGTON (AP) — Federal Reserve officials expect the Iran war will worsen inflation this year while having little impact on economic growth, but they still expect to cut their key rate once in 2026.
For now, Fed policymakers left short-term interest rates unchanged Wednesday for the second straight meeting at about 3.6%. In a statement, the central bank said that the “implications of developments in the Middle East for the U.S. economy are uncertain.”
Still, by keeping their forecast for a rate cut this year and next — the same projections that they made in December — central bank policymakers appear to expect the gas price spike from the Iran war to have a largely temporary effect on inflation and the economy. Policymakers also foresee unemployment remaining unchanged by the end of this year, a more optimistic outlook than most outside economists.
Whether that turns out to be true will largely depend on the length of the conflict in the Middle East. The officials expect inflation to fall back to 2.2% in 2027 and hit the Fed’s 2% target in 2028.
Speaking to reporters after the rate decision was announced, Fed Chair Jerome Powell maintained a largely optimistic outlook, pointing out that in recent years the economy has been hit with numerous shocks — tariffs, the Fed’s own rate hikes in 2022 and 2023, the aftermath of the pandemic — and has avoided recession all along.
“The U.S. economy has been doing really well through a lot of challenges,” Powell said. “It’s been amazing to see.”
Powell did clarify a key question about the Fed’s future: He said he has “no intention” of leaving the central bank until an investigation into his congressional testimony about the Fed’s building renovation is dropped. Last Friday, a judge threw out a pair of subpoenas that the Justice Department had issued to the Fed, dealing a blow to the investigation. But U.S. Attorney Jeannine Pirro has said she will appeal the ruling.
Powell’s term as Fed chair is scheduled to end on May 15, and President Donald Trump has nominated a former top Fed official, Kevin Warsh, as his replacement. Warsh’s nomination has been delayed in the Senate because key Republican senators are opposed to the DOJ probe.
After the investigation is resolved and even after Warsh is confirmed, Powell could elect to stay on the board to finish his term as a Fed governor, which lasts until January 2028. But he told reporters he had not yet made that decision.
With the economy’s future so uncertain, Powell underscored that any further cuts to rates this year were hardly locked in.
“The rate forecast is conditional on the performance of the economy, so if we don’t see that progress then you won’t see the rate cut,” he said.
In the Fed’s quarterly economic projections, also released Wednesday, officials only modestly raised their forecasts for inflation, and now expect it will end this year at 2.7%, up from their December forecast but slightly below the 2.8% it reached in January. They expect core inflation, which excludes the volatile food and energy categories, to also finish the year at 2.7%.
Fed officials slightly boosted their outlook for growth this year and expected unemployment to stay unchanged at 4.4%.
Tim Duy, chief economist at SGH Macro, said the forecasts were essentially “stale” as policymakers avoided fully taking into account the impacts of the Iran war on the economy.
The Fed considers core prices a better measure of longer-run inflation. Consumer prices will spike higher in the coming months as gas prices have soared, but those increases could unwind by the end of the year, particularly if the conflict ends soon.
One Fed official, governor Stephen Miran, dissented in favor of a quarter-point cut. Miran was appointed by President Donald Trump last September.
On Wall Street, losses for stocks deepened after the Fed’s decision. The S&P 500 fell 1.4% and the Dow Jones Industrial Average dropped 768 points, or 1.6%.
Gas prices jumped Wednesday to a nationwide average of $3.84 a gallon, according to AAA, up 92 cents from a month ago. The increase will push inflation much higher in March, but core inflation, since it excludes gas, could be much less affected.
Typically, the Fed would look past a supply shock like the disruption in oil supplies from the Middle East and its impact on inflation. Once it ends, any inflation it produces may fall back, without the Fed having to raise rates. As a result, the Fed could leave rates unchanged — or even cut them to boost weak hiring.
Yet as the economy emerged from the pandemic in 2021, inflation jumped as Americans sharply raised their spending, aided by stimulus checks and pandemic-era savings. Powell initially said that inflation would be “transitory” and would fade as the economy returned to normal. Instead it spiked to a four-decade high in June 2022. With inflation still elevated, many Fed officials are wary of repeating the mistake.
This week’s meeting will be Powell’s second-to-last, unless Warsh isn’t confirmed by May 15, at which point Powell could remain chair of the Fed’s rate-setting committee until a replacement is named.
Even before the Iran war, problems had cropped up in both the inflation and jobs data, putting the Fed in a tight spot. Prices rose more quickly in January than in recent months, according to the Fed’s preferred measure, with inflation excluding food and energy reaching 3.1% compared with a year earlier. That is little changed from where it was two years ago, a sign that prices are still rising at a stubbornly elevated pace.
Yet hiring has also stumbled. Businesses and other employers shed 92,000 jobs in February, the government reported earlier this month, an unexpectedly weak showing that followed an encouraging gain of 130,000 in January. The unemployment rate ticked higher to a still-low 4.4% from 4.3%.
(Copyright 2026 WBAP/KLIF Newsroom News. All rights reserved. Contains material from the Associated Press.)
