Federal Reserve holds interest rates steady, citing elevated economic uncertainty

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

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

Rate cuts still on the table?

Fed officials indicated they still expect to cut their key rate once in 2026, the same projection as in December. By keeping their forecast for a rate cut this year and next, policymakers appear to expect that the spike in energy prices from the Iran war will have a transitory effect on inflation and the economy. 

The central bank is facing a murkier economic outlook for the U.S., with the Iran war causing energy prices to spike and threatening to drive up inflation. Before the start of the war on February 28, economists had penciled in the next rate cut for the Fed's June meeting, but the probability of that happening is now seen as 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 is not going to rock the interest rate boat during a supply shock," said Jamie Cox, managing partner for Harris Financial Group, in an email after the Fed's decision.

Maintaining the projection of one additional cut in 2026 is a "positive note," said Matt Stucky, chief portfolio manager, equities at Northwestern Mutual, in an email. He added, "The Fed seems willing to tolerate some 'transitory' energy inflation and resume cuts later in the year."

Inflation expected to rise

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

In a Wednesday afternoon press conference to discuss the rate decision, Fed Chair Jerome Powell emphasized that the economic hit from the Iran war remains unclear, including the impact on consumers, who are now facing sharply higher gas prices and who could eventually cut back spending on other areas.

"The thing I want to emphasize is nobody knows," Powell said. "If we have a long period of much higher gas prices, that will weigh on consumption, but we don't know if that will happen."

Still, Powell also noted that the spike in energy prices will stoke inflation in the near term, while acknowledging that the duration and scale of that increase remain unclear. 

"Powell's own words, however, were sobering: 'If we don't see progress on inflation, we won't see a rate cut'," noted Mark Vickery, senior market analyst at Zacks Investment Research, in an email.

Stocks fell on Wednesday on concerns about higher oil prices fueling inflation and Powell's cautious remarks. The S&P 500 dropped 91 points, or 1.4%, to close at 6,625, while the Dow Jones Industrial Average and Nasdaq Composite sank 1.6% and 1.5%, respectively.

Signals suggest that inflation remained sticky even before the Iran war drove up energy prices this month. On Wednesday, the Labor Department reported that its producer price index, which measures inflation before it hits consumers, rose 3.4% in February on an annual basis. That increase — the largest in a year — was hotter than expected by economists.

"This isn't the kind of PPI report the Fed wants to see," Nationwide Financial Markets economist Oren Klachkin said in an email. "This report suggests inflation was going to accelerate even before the Iranian conflict hit."

At the same time, the labor market is also facing headwinds. The U.S. shed 92,000 jobs in February, a sharp and unexpected setback after economists had forecast a gain of 60,000 jobs. 

Powell staying until probe ends

At his press conference, Powell noted that the economy has sailed through recent headwinds with resilience, and added that he believes the economy is "doing pretty well," despite the uncertainty around inflation, the Iran war and the job market. 

Powell added that he intends 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, although he can continue as an FOMC member through January 2028. 

"I have no intention of leaving the board until the investigation is well and fully over," he said. 

Last week, a judge quashed a pair of grand jury subpoenas sent to the Fed as part of a criminal probe into building renovations by U.S. Attorney Jeanine Pirro's office, saying they were a pretext to pressure Powell into supporting lower interest rates or resigning. Pirro said she would appeal the decision.

President Trump has repeatedly called on Powell to cut rates, a sentiment he again voiced on Wednesday in a social media post asking, "When is "Too Late" Powell lowering INTEREST RATES?"

In January, Mr. Trump nominated former Fed official Kevin Warsh to replace Powell as chair. Warsh still requires Senate confirmation to step into the role, and Senator Thom Tillis, a Republican from North Carolina who sits on the Senate Banking Committee, has said he will oppose any Fed nominees while the DOJ continues its investigation.

If his successor isn't confirmed before the end of his term in May, Powell said he will serve as pro tem chair until Warsh can step into the role.

"That is what the law calls for," he said.