Fed leaves interest rates unchanged, expects inflation to rise

WASHINGTON - The U.S. central bank held interest rates steady on Wednesday and projected higher inflation, steady unemployment and a single reduction in borrowing costs this year, a path that Federal Reserve Chair Jerome Powell said was subject to unusually high uncertainty as policymakers take stock of the impact of the U.S. and Israeli war with Iran.

"In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy," Powell said in a press conference following the Fed's 11-1 decision to maintain its benchmark overnight interest rate in the 3.50%-3.75% range. "The thing I really want to emphasize is that nobody knows: the economic effects could be bigger, they could be smaller; they could be much smaller or much bigger; we just don't know."

New projections showed Fed policymakers as a group expect to cut the policy rate by a quarter of a percentage point by the end of this year, a view that on the surface was unchanged from their last set of projections in December.

Powell noted, however, that individual projections show a "meaningful" number of policymakers are penciling in less easing this year than they did three months ago.

And the possibility that the Fed's next move "might be an increase did come up at the meeting as it did at the last meeting," Powell said, though he added that the "vast majority" of the officials don't have that outcome as their base case.

Monetary policy, he repeated, is "well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, evolving outlook, and the balance of risks."

Powell's remarks prompted traders to pile into bets that the Fed will wait until next year to cut rates. U.S. stocks slumped, with the S&P 500 index falling about 1.4% to its lowest close in nearly four months. The dollar jumped against a basket of currencies while U.S. Treasury yields rose. The Fed is in the difficult position of needing to balance the risk of higher inflation amid a fresh shock and downside risks to the labor market, said Powell, whose term as Fed chief ends in May.

"I wouldn't say that it's clear at all that one is more at risk than the other."

Fed policymakers now expect inflation, as measured by the central bank's preferred gauge, to end the year at 2.7%, not far below the current rate and higher than the 2.4% projected in December, reflecting fallout from the spike in global oil prices that followed the start of the bombing campaign against Iran. But the higher inflation projections also are due to stickier tariff-driven inflation slowing progress towards the Fed's 2% inflation goal, Powell said.

"The thing that's really important that we see this year is progress on inflation through a reduction in goods inflation," he said.

The new rate and economic projections showed the Fed, for now, largely looking through the oil shock, with policymakers still expecting to lower rates this year and anticipating inflation to be 2.2% by the end of 2027.

Notably, no policymakers saw rates needing to move higher by the end of this year, though one official anticipated a rate hike in 2027.

Economic growth was upgraded slightly, to 2.4% for 2026 versus 2.3% in December, and the projected unemployment rate was unchanged at 4.4%.