The Federal Reserve on Wednesday held interest rates steady, as the U.S.-Israeli war with Iran disrupts the global economy and sends oil prices soaring.
Two weeks after the initial attacks, unleaded and diesel gas prices have skyrocketed alongside the cost of oil.
“The implications of developments in the Middle East for the U.S. economy are uncertain,” the Fed said in its statement.
"Near term measures of inflation expectations have risen in recent weeks, likely reflecting the substantial rise in oil prices caused by the supply disruptions in the Middle East," Powell said at a press conference in Washington.
"Higher energy prices will push up overall inflation," he added, "but it is too soon to know the scope and duration of the potential effects on the economy."
The Fed's target range for its benchmark rate remains at 3.50% to 3.75%. The rate is what banks pay to borrow money from each other overnight, but it influences interest rates for consumer lending.
The Fed’s policymakers also released a fresh Summary of Economic Projections, showing they still expect one benchmark interest rate cut in 2026 and another in 2027.
Officials on the Fed’s Open Market Committee, which votes on the trajectory of rate cuts, now see core inflation hitting 2.7% by the end of the year, up slightly from its December forecast.
They also said they see U.S. economic output, or GDP, at 2.4% this year, up one tenth of a percent from their last projection.
But Powell emphasized that it's too soon to know for sure how the energy shock will play out. "The thing I really want to emphasize is that nobody knows," he said, speaking about the economic projections.
"If we were ever going to skip [a Summary of Economic Projections], this would be a good one, because we just don't know," Powell added.
The only official to vote against keeping rates unchanged was President Donald Trump's nominee Stephen Miran, who sought a 0.25% cut.
Price shock
When the United States and Israel attacked Iran on Feb. 28, the Islamic Republic responded in part by blockading the Strait of Hormuz, a crucial transit route for oil from the Middle East.
Overnight, the cost of crude oil soared. The price of gasoline quickly followed.
As of Wednesday, U.S. crude oil prices are up more than 40% and the average retail price of unleaded gas in the country had risen more than 75 cents a gallon since the war began.
The diesel fuel that powers the ships, trucks and trains along America's domestic supply chain topped $5 a gallon Tuesday for the first time since 2022.
It’s not just oil and gas prices that are rising. The cost of jet fuel has soared, too, as has home heating oil.
Meanwhile, American consumers are already frustrated by the high cost of living. And news headlines about mass corporate layoffs reinforce the view that the U.S. labor market is in a fragile state.
"We’re well aware of the performance of inflation over the last few years, and how a series of shocks have interrupted progress that we’ve made over time," Powell said.
"It will take some years of positive, real earning gains for people to feel good again, we think," Powell added when asked about the affordability issue. "There are areas where where prices are still going up, like insurance, various different kinds of insurance are getting more and more expensive, and that's just catching up from inflationary pressures that take a while to get to into the price."
"It's a very real thing from the standpoint of what people are experiencing," he said.
A blurry economic outlook
While the unemployment rate only ticked up fractionally in the most recent jobs report, overall the report showed a loss of 92,000 jobs for February. It also contained sharp downward revisions to January and December’s jobs reports.
Inflation, meanwhile, remains sticky, having come in at 2.4% in both January and February. That’s after falling from 3% in September.
Overall, the committee’s forecast for the coming year, “Is that we will be making progress on inflation,” said Powell. “Not as much as we had hoped, but some progress on inflation.”
Whether there are interest rate cuts, he said, will be determined by whether inflation comes down far enough to justify lower borrowing costs to help stimulate the economy.
“If we don’t see that progress, then you won’t see the rate cut,” said Powell.
Complicating the economic forecast further is a new jolt of tariff uncertainty brought on by the Supreme Court's Feb. 20 ruling that struck down many of Trump’s sweeping country-based tariffs.
Trump replaced those with a short-term global 10% tariff that he promised to raise to 15%, but so far has not.
In the meantime, the administration has quickly initiated dozens of probes into key trading partners, setting the stage for another wave of tariffs later this year.
A political cloud
As Powell and the Fed work to navigate the complicated economic situation, the independent agency is also facing a set of political challenges that have no precedent in modern American history.
In a case whose outcome could dramatically alter the independence of the Federal Reserve, the Supreme Court has heard oral arguments — but has yet to rule — on the future of Fed governor Lisa Cook, whom Trump has attempted to fire.
Also in legal limbo is a Justice Department probe into Powell and his testimony to Congress about Fed headquarters renovations.
Lawmakers on Capitol Hill were outraged to learn of the investigation, which Powell says is nothing more than an effort to pressure him into bowing to Trump's demand that he back interest rate cuts at the Fed.
On Wednesday, Powell said he has “no intention of leaving the board until the investigation is well and truly over with transparency and finality.”
He also left the door open to remaining as a governor on the Fed’s board until his term in that role ends in 2028.
On Capitol Hill, the Powell probe has jammed up the confirmation process for the president’s pick to replace Powell as chair, economist Kevin Warsh.
Until the probe is dropped, North Carolina Republican Sen. Thom Tillis has vowed to block any Fed confirmations.
Powell said he will remain as Fed chair pro-tempore if Warsh is not confirmed by May, when Powell's term as chair ends.
