Powell Says Economic Implications of Iran War Are 'Uncertain'

Fed Chair Jerome Powell told reporters that the impact of events in the Middle East is 'uncertain' for the US economy as the Fed held rates steady amid rising oil prices. Federal Reserve officials left interest rates unchanged and continued to expect one rate cut this year as they acknowledged increased uncertainty due to war in the Middle East.

Chair Jerome Powell emphasized that to resume lowering rates, officials would have to see progress in reducing inflation, especially goods inflation that has been boosted by tariffs.

“If we don’t see that progress, then we won’t see the rate cut,” Powell said in remarks to reporters after the Fed released its decision.

That progress may be difficult to achieve. In economic forecasts released with their decision, officials raised their outlook for inflation in 2026 to 2.7% from 2.4%. Notably, they saw the core measure — which excludes volatile food and energy categories — also rising to 2.7%. The S&P 500 index extended losses as Powell spoke, while Treasury yields and the dollar rose.

Powell Staying

Powell surprised Fed watchers by making some definitive statements about his near-term future at the central bank. He told reporters he had “no intention” of resigning as a member of the Fed’s Board of Governors until an investigation by the Department of Justice into a building renovation project is “well and truly over.”

He said that if his successor is not confirmed before his term as chair ends in May, he would serve as chair pro tempore. The Fed has conferred that temporary designation in the past on a board member to lead the institution when the chair role was vacant. Powell’s term as a governor extends until January 2028.

He said he hadn’t decided whether he would depart if the investigation were closed.

The Federal Open Market Committee voted 11-1 to hold the benchmark federal funds rate in a range of 3.5% to 3.75%. Governor Stephen Miran dissented, calling for a quarter-point reduction.

In their post-meeting statement, policymakers underscored the uncertainty they’re facing in the economy due to the conflict in the Middle East, as did Powell in his press conference.

“It is too soon to know the scope and duration of the potential effects on the economy,” Powell said. “The thing I really want to emphasize is that nobody knows.”

Asked about the impact of surging oil prices on inflation, Powell acknowledged that central bankers typically don’t raise rates when energy prices jump because the impact on inflation is temporary. But that approach, he said, has always depended on the public continuing to expect inflation will settle around the Fed’s 2% goal over the long term. He also noted that inflation in the US has been above the Fed’s 2% target for five years.

Powell said the committee had again discussed the possibility that the Fed’s next rate move could be a hike, but added, “the vast majority of participants don’t see that as their base case.”

Second Straight Hold

Wednesday’s decision marks the second straight time officials held rates in place, though the economic backdrop has changed significantly since their last meeting. In January, policymakers signaled growing confidence the unemployment rate was stabilizing. Soon after, several officials sounded intent on holding rates for an extended period to help nudge inflation lower.

Then came a weak February employment report that cast fresh doubt on the steadiness of the labor market. US-Israeli strikes against Iran that began Feb. 28 have also caused global oil prices to surge, threatening to boost inflation and undermine growth and employment.

Officials dropped language from their January statement describing the labor market as showing signs of stabilization. In its place, they said the unemployment rate was “little changed in recent months.”

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