WASHINGTON – The Federal Reserve voted Wednesday to keep its key interest rate unchanged as policymakers weather higher-than-expected inflation, mixed labor market signs and war.
In a widely anticipated decision, the Federal Open Market Committee voted 11-1 to keep the benchmark federal funds rate unchanged at a range of 3.5% to 3.75%. This rate determines overnight funding costs for banks, but it also affects a wide range of borrowings for consumers and businesses.
In a statement after the meeting, the committee made little change to its view on the economy, saying it expected growth to accelerate slightly and inflation to rise in 2026.
Despite the heightened uncertainty, officials reiterated that they still expect several rate cuts. A closely watched “dot plot” reflecting individual members’ interest rate forecasts suggests one cut this year and another in 2027, but the timing remains uncertain.
Of the 19 FOMC participants, seven indicated they expect rates to remain unchanged this year, an increase of one from the last update in December. The outlook for the future is for a fairly wide range of spending, but the median outlook is for another rate cut in 2027 before the fund rate stabilizes around 3.1% in the long term.
Stocks fell to session lows as the central bank’s decision and Federal Reserve Chair Jerome Powell’s comments drew attention to the persistent threat of inflation.
The impact of war is ‘uncertain’
One factor is the uncertainty surrounding the war with Iran, which began about three weeks ago. The fighting in the Strait of Hormuz and its fallout could disrupt global oil markets and threaten to keep inflation above the Fed’s 2% target.
“The impact of developments in the situation in the Middle East on the U.S. economy is unclear,” the statement said.
Powell told a news conference that it was “too early to know” the impact of the war.
“Near-term indicators of inflation expectations have risen in recent weeks, likely reflecting the significant rise in oil prices due to supply disruptions in the Middle East,” he said.
Amid growing concerns about the employment situation, Gov. Stephen Milan again opposed the measure, supporting a quarter-point cut. Gov. Christopher Waller, who joined Mr. Milan in January in calling for cuts, also voted to leave the cuts in place this time.
Before the dispute, markets had priced in two cuts this year, with a third seen as unlikely. But rising oil prices and a solid set of inflation indicators with pre-energy shock data keep expectations at most one rate cut in 2026.
faster economic growth
In their latest economic forecast, Fed officials expect gross domestic product (GDP) to grow at a 2.4% pace this year, slightly faster than in December. Growth in 2027 is expected to remain strong at 2.3%, three-tenths of a percentage point higher than the previous forecast.
Officials also revised upward their inflation outlook for this year. They currently expect the Personal Consumption Expenditure Price Index to reflect both headline and core inflation of 2.7%. But as the effects of tariffs and wars wear off, he expects inflation to recede to near the Fed’s 2% target over the next few years. Despite a series of weak jobs reports, policymakers continue to expect the unemployment rate to be 4.4% by the end of the year.
The Fed’s decision to keep the rate on hold is against a complex political backdrop.
President Donald Trump continues to demand interest rate cuts from Powell and others. President Trump criticized Powell earlier this week for not convening a special meeting to try to ease the economy, even as inflation remains high and the impact of the war remains uncertain.
For his part, Powell presided over what could be his penultimate meeting as central bank governor. His term is scheduled to end in May, and President Trump has nominated former Federal Reserve Director Kevin Warsh to replace him. Mr. Warsh has indicated he favors lower interest rates, but he has not made any public statements recently about his current thinking.
Further complicating this dynamic is President Trump’s own Justice Department.
U.S. Attorney Jeanine Pirro in Washington subpoenaed Powell for evidence regarding the multibillion-dollar renovation of the Federal Reserve’s headquarters. But Mr. Powell resisted the subpoena, accusing President Trump of using the subpoena as an excuse to pressure the Fed to lower interest rates. The judge sided with Mr. Powell on this issue and dismissed the subpoena, agreeing that he simply twisted and severed Mr. Powell’s arm.
But Pirro has vowed to appeal, and Republican Sen. Thom Tillis has said he will block Warsh’s nomination to the Senate Banking Committee until the Powell issue is resolved. Assuming the legal battle continues beyond May, Powell will remain in the seat until Warsh’s confirmation is granted.
Powell touched on this point at a press conference, saying, “I will not resign from the board until the investigation is fully and truly concluded with transparency and finality.”
Even after that, Powell won’t make a decision. “I haven’t made that decision yet, but I will make a decision based on what I think is best for the facility and the people we serve.”
Powell’s term on the board does not expire until early 2028.
Correction: An earlier version of this article misspelled Sen. Thom Tillis’ name.
