Fed keeps rates steady as Iran conflict roils economy |
Fed keeps rates steady as Iran conflict roils economy
The Federal Reserve held interest rates steady Wednesday as bankers stared down the evolving economic blowback from the war in Iran.
The Federal Open Market Committee (FOMC), the panel of bank officials responsible for setting borrowing costs, maintained its baseline interest rate at a range of 3.5 to 3.75 percent.
FOMC officials voted 11-1 to keep rates unchanged, with only Fed board member Stephen Miran calling for a 0.25 percentage point cut.
Wall Street expected the Fed to hold fast even before the Middle East erupted after months of inconsistent job gains and little progress in bringing inflation down to a 2 percent annual rate, the Fed’s rough target for price growth.
Traders set the odds of the Fed not moving rates Wednesday at 99 percent, up from 93.6 percent one month ago, according to the CME FedWatch tool, which tracks options trades on Fed rate futures.
The conflict in Iran has only made the Fed’s job more difficult and the outlook for the economy more uncertain, with little sign of military or diplomatic breakthrough on either side.
Iran’s throttling of the Strait of Hormuz has diminished the global supply of oil, natural gas, fertilizer and other crucial exports that would have otherwise transited through the Persian Gulf and beyond. Iranian military forces have also damaged or destroyed oil facilities in other Gulf states, and Iranian leadership has pledged to use the oil trade as an economic weapon against the U.S.
International oil prices rose to more than $109 per barrel Wednesday morning amid further threats from Iran, while U.S. oil prices topped $98 per barrel. The spike in oil prices has driven gasoline prices higher, with the national average price of a gallon of unleaded regular gas spiking Wednesday to $3.84, according to AAA, up from $3.58 one week ago and $2.92 one month ago.
The Fed has historically not factored major supply shocks into its longer-run views of inflation, especially in food and energy, where prices are often volatile. But the bank is also under higher pressure to avoid another inflation surge after losing control of prices during the aftermath of the COVID-19 pandemic and supply shocks driven by the war in Ukraine.
Prices rose 2.8 percent annually since January, according to the personal consumption expenditures (PCE) price index, the Fed’s preferred gauge of inflation.
Without food and energy prices, annual inflation was 3 percent as of January, a full percentage point above the Fed’s target, according to the PCE data, which was delayed by the federal government shutdown earlier this year.
Producer prices also clocked the largest one-year increase last month since February 2025, rising 3.4 percent annually, according to data released Wednesday by the Labor Department.
“With interest rates close to neutral, high oil prices adding upside risk to inflation, and unemployment broadly stable, we expect the Fed to remain on hold until June before cutting rates further,” wrote Grace Zwemmer, a U.S. economist at Oxford Economics, in an analysis ahead of the Fed meeting.
“Recent tariff policy changes have increased the odds of more trade volatility in 2026, which could keep this area of producer prices elevated,” she added.
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