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, supply shocks driven by the war in Ukraine and tariffs implemented by President Trump.

“The thing that’s really important that we see this year is progress on inflation through a reduction in goods inflation as the one-time effects on prices of tariffs go through the system, go through the economy,” Federal Reserve Chair Jerome Powell said during a Wednesday press conference following the meeting.

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.

“If you look at … total core inflation, it’s about 3 percent, and some big chunk of that — between a half and three-quarters [of a percentage point] — is actually tariffs. So we’re looking for progress on that,” Powell continued. “The question of whether we look through the energy inflation doesn’t really arise until we have kind of checked that box.”

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.

As bank officials sort through the impact of the Iran war, the Fed is fighting a legal battle of its own with the Trump administration. 

The Department of Justice (DOJ) has refused to back down from a criminal probe into the bank and Powell, even as it imperils Trump’s plans to replace the Fed chief with a nominee more sympathetic to his views.

Trump has been eager to replace Powell for the majority of his two White House stints, often calling his decision to nominate the Fed chair among the biggest mistakes of his presidency.

Powell has refused to yield to Trump’s pressure and vowed to defend the bank’s independence from political interference through the end of his time at the Fed.

With just one more FOMC meeting left in Powell’s term, which ends in May, Trump is within striking distance of replacing him with former Fed board member Kevin Warsh, who is expected to easily be confirmed by the GOP-controlled Senate.

But whether Warsh gets a confirmation vote before Powell’s term ends may depend on whether Trump and the DOJ are willing to end its criminal investigation.

Sen. Thom Tillis (R-N.C.) has vowed to block any Trump Fed nominee from full consideration until the DOJ probe is resolved, and he can also hold up Warsh’s nomination through his membership on the Senate Banking Committee, which must first recommend the nominee for a confirmation vote.

Tillis urged the administration to end its probe into Powell last week after a federal judge quashed subpoenas issued to the Fed and its chair on the grounds that they were improperly issued for political purposes.

Trump and the DOJ, however, have doubled down on the investigation, even if it keeps Powell atop the Fed beyond the end of his chairmanship.

While Powell’s term as chair ends in May, he will be able to stay on the Fed board as a member through the end of his separate term as a governor, which lasts until 2028. The FOMC has also voted to keep Powell as leader of the rate-setting panel until his successor is confirmed.

According to a DOJ filing, Powell’s personal attorneys suggested that he would be unlikely to leave the Fed while there is still an active criminal investigation, but the resolution of the probe would make it easier for him to consider his options. His personal legal team also asserted Trump does not currently have the votes to confirm Warsh as Fed chief, according to the DOJ, suggesting a deeper well of GOP opposition driven by the criminal probe.

Powell also confirmed Wednesday that he would not leave the Fed until the probe is concluded “with finality.”