WASHINGTON (AP) — Federal Reserve officials expect Iran war to worsen inflation Although there will be little impact on economic growth this year, it still expects to cut key interest rates once in 2026.
For now, Fed policymakers on Wednesday left short-term interest rates unchanged for the time being. Second consecutive year of talks Approximately 3.6%. “The impact of developments in the Middle East on the U.S. economy is unclear,” the central bank said in a statement.
Still, by maintaining their forecast for interest rate cuts this year and next (the same as in December), central bank policymakers appear to be anticipating that higher gasoline prices due to the Iran war will have a mostly temporary impact on inflation and the economy. Policymakers also expect the unemployment rate to remain flat by the end of this year, a more optimistic outlook than most outside economists.
Whether that turns out to be true will largely depend on the length of the Middle East conflict. Officials expect inflation to return to 2.2% in 2027 and reach the Fed’s 2% goal in 2028.
Powell told reporters after the rate decision was announced that higher oil and gas prices would push up inflation in the short term, but it was too early to know the potential impact on the economy.
“The U.S. economy is doing pretty well, but we don’t know what kind of impact this is going to have. No one really knows,” Powell said.
In their economic outlook, Fed officials now expect inflation to end this year at 2.7%, higher than their December forecast but slightly below the 2.8% reached in January. Core inflation, which excludes the volatile food and energy sectors, is also expected to end the year at 2.7%, up from the previous forecast of 2.5%. The Fed believes that core prices are a better measure of long-term inflation. Consumer prices will rise sharply in the coming months due to higher gasoline prices, but the rise could end by the end of the year, especially if the conflict ends soon.
The Fed also doesn’t expect the war to have a lasting impact on growth or unemployment. Officials expect the unemployment rate to remain at 4.4% at the end of this year, the same as it is now. Furthermore, the economic growth rate is expected to be 2.4% this year, slightly up from the 2.3% forecast in December.
One Fed official, Stephen Milan, opposed it in favor of cutting rates by a quarter of a point. Milan was appointed by President Donald Trump last September.
gas price The national average price rose to $3.84 per gallon on Wednesday, an increase of 92 cents from a month ago, according to AAA. This increase will cause inflation to rise significantly in March, but because core inflation does not include gasoline, it may not have much of an impact.
Normally, the Fed would avoid supply shocks, such as disruptions to oil supplies from the Middle East and their impact on inflation. Once that ends, the inflation it creates could be reversed even if the Fed doesn’t raise rates. As a result, the Fed could leave interest rates unchanged or even cut them to encourage sluggish employment.
But as the economy emerged from the pandemic in 2021, inflation spiked as Americans sharply increased spending, helped by stimulus checks and pandemic-era savings. Powell initially said inflation was “temporary” and would decline as the economy returned to normal. Instead, it soared to a 40-year high in June 2022. With inflation remaining high, many Fed officials are wary of repeating their mistakes.
This week’s meeting will be the last chaired by Mr. Powell. His term ends on May 15, and President Donald Trump has appointed the former Fed official. Kevin Warshin his place. But Mr. Warsh’s nomination in the Senate has been delayed as key Republican senators oppose a Justice Department investigation into Mr. Powell over his testimony regarding building renovations.
Last Friday, the judge issued a pair of subpoenas The Justice Department’s announcement to the Feds dealt a blow to the investigation. However, U.S. Attorney Jeanine Pirro said she would appeal the ruling.
This week’s meeting will be Mr. Powell’s penultimate meeting, but unless Mr. Warsh approves by May 15, at which point Mr. Powell could remain as chairman of the Fed’s rate-setting committee until a successor is named.
Even before the Iran war, problems were brewing between the two countries. inflation and work Data is leaked and the Fed is in trouble. Prices rose faster in January than in recent months, with inflation excluding food and energy reaching 3.1% from a year earlier, according to the Fed’s recommended metrics. This is little changed from two years ago, indicating that prices are still rising at a stubborn pace.
However, employment is also sluggish. The government announced earlier this month that businesses and other employers had 92,000 jobs in February, an unexpectedly weak showing after January’s 130,000 increase. The unemployment rate rose from 4.3% to a still low level of 4.4%.
