Fed holds interest rates steady for now but still anticipates one rate cut later this year
A truck is fueled at a gas station and truck stop on March 3
Washington (CNN) — The Federal Reserve on Wednesday kept interest rates unchanged, as expected, but noted the “uncertain” impact to the US economy from the US-Israeli war with Iran.
Fed officials voted to leave their benchmark lending rate at a range of 3.5%-3.75% for the second consecutive meeting.
The decision, however, wasn’t unanimous, with Fed Governor Stephen Miran casting a dissenting vote in favor of a quarter-point rate cut, the longest stretch of back-to-back dissents since 2013. So far, Miran has dissented on all of the five Fed decisions he’s been a part of since becoming a monetary policymaker in September, backing lower rates than the majority wants.
Officials also released new economic projections, showing that they are still penciling in just one rate cut this year, though the estimates can change, depending on what happens with the US economy between now and the next projections in June.
The Fed last year lowered rates three times in response to a weakening labor market, though officials have said in recent public speeches that the Middle East conflict is giving them some pause as they try to gauge its potential impact on inflation. Economists widely expect inflation to go up, but the extent remains to be seen, depending largely on the breadth and duration of the Iran war.
The Fed’s latest policy statement acknowledged the conflict looming over the global economy: “The implications of developments in the Middle East for the US economy are uncertain.”
America’s rate setters remain in a difficult spot as they face the twin threats of higher inflation and a job market still on shaky footing. But for now, the Fed is expected to wait on the sidelines and see everything play out, at least through the next meeting in late April. Wall Street isn’t expecting a rate cut this year, with those chances dimming even further after inflation data this morning showed growing price pressures at the wholesale level.
The economy’s various risks
The Iran war poses a “stagflationary shock,” according to Michael Pearce, chief US economist at Oxford Economics.
That means it can both weaken growth and stoke inflation at the same time, though the US economy is currently far from the state it was in during the 1970s and early 1980s, when both unemployment and inflation were in the double digits. The unemployment rate in February was at a low 4.4%; and inflation, as measured by the Personal Consumption Expenditures price index, registered at 2.8% in January.
Still, the direction of travel is unsettling for central bankers, who are tasked with tackling both of those issues head on. The problem is that the Fed cannot address both at the same time, at least not successfully. Under former Fed Chair Arthur Burns during stagflation decades ago, officials hiked rates to tamp down inflation, then stopped for periods of time to stimulate the economy. It eventually became clear that stop-and-go strategy played a major role in keeping inflation entrenched.
Last year when both sides of the Fed’s mandate were under stress, Powell said officials will look to address whichever problem is in the worst state first. Their reaction function is also based on how long they think certain price pressures may stick around. For tariffs, Fed officials broadly agree that it will likely result in just a one-time increase in the price level, though the Supreme Court’s ruling striking down a bulk of Trump’s tariffs and Trump’s recently enacted 15% global tariffs make that less clear.
On any potential inflation spurred by the Iran war, Fed officials also seem confident that it may be short lived. The median projections for both overall and core inflation were revised higher in these projections, compared to December’s, but officials are also projecting both of those rates to come down in 2027.
The expectation of one rate cut this year also suggests officials predict any inflation stemming from the oil crisis may be temporary.
This story is developing and will be updated.
The-CNN-Wire
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