Fed projects one rate cut this year, as Powell vows to stay on until DOJ investigation is finished

WASHINGTON (AP) — Federal Reserve officials expect the Iran war will worsen inflation this year while having little impact on economic growth, but they still expect to cut their key rate once in 2026.

For now, Fed policymakers left short-term interest rates unchanged Wednesday for the second straight meeting at about 3.6%. In a statement, the central bank said that the “implications of developments in the Middle East for the U.S. economy are uncertain.”

Still, by keeping their forecast for a rate cut this year and next — the same projections that they made in December — central bank policymakers appear to expect the gas price spike from the Iran war to have a largely temporary effect on inflation and the economy. Policymakers also foresee unemployment remaining unchanged 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 conflict in the Middle East. The officials expect inflation to fall back to 2.2% in 2027 and hit the Fed’s 2% target in 2028.

Speaking to reporters after the rate decision was announced, Powell said that in the short-term, higher oil and gas prices will elevate inflation, but it is too soon to know the potential impacts on the economy.

“The U.S. economy is doing pretty well, it’s just we don’t know what the effects of this will be, and really no one does," Powell said.

When asked about an ongoing investigation by the Justice Department into building renovations at the Fed, Powell said that he has “no intention” of leaving the central bank until the investigation is over. Last Friday, a judge threw out a pair of subpoenas that the Justice Department had issued to the Fed, dealing a blow to the investigation. But U.S. Attorney Jeannine Pirro has said she will appeal the ruling.

Powell’s term as Fed chair is scheduled to end on May 15, and President Donald Trump has nominated a former top Fed official, Kevin Warsh, to replace Powell as chair. Warsh’s nomination has been delayed in the Senate because key Republican senators are opposed to the DOJ investigation.

Powell could elect to stay on the board to finish his term as a Fed governor but he told reporters he had not yet made that decision.

In their economic projections, Fed officials now forecast that inflation will be 2.7% at the end of this year, up from their December forecast but slightly below the 2.8% it reached in January. They expect core inflation, which excludes the volatile food and energy categories, to also finish the year at 2.7%, up from a previous forecast of 2.5%. The Fed considers core prices a better measure of longer-run inflation. Consumer prices will spike higher in the coming months as gas prices have soared, but those increases could unwind by the end of the year, particularly if the conflict ends soon.

The Fed also expects that the war will have no sustained impact on growth or unemployment. Officials still see the unemployment rate at 4.4% at the end of this year, the same as it is now. And they project the economy will grow 2.4% this year, up slightly from a 2.3% forecast in December.

One Fed official, governor Stephen Miran, dissented in favor of a quarter-point cut. Miran was appointed by President Donald Trump last September.

On Wall Street, losses for stocks deepened after the Fed's decision. As of 3:15 p.m. ET, the S&P 500 was down 1% and the Dow Jones Industrial Average was off 628 points, or 1.3%.

Gas prices jumped Wednesday to a nationwide average of $3.84 a gallon, according to AAA, up 92 cents from a month ago. The increase will push inflation much higher in March, but core inflation, since it excludes gas, could be much less affected.

Typically, the Fed would look past a supply shock like the disruption in oil supplies from the Middle East and its impact on inflation. Once it ends, any inflation it produces may fall back, without the Fed having to raise rates. As a result, the Fed could leave rates unchanged — or even cut them to boost weak hiring.

Yet as the economy emerged from the pandemic in 2021, inflation jumped as Americans sharply raised their spending, aided by stimulus checks and pandemic-era savings. Powell initially said that inflation would be “transitory” and would fade as the economy returned to normal. Instead it spiked to a four-decade high in June 2022. With inflation still elevated, many Fed officials are wary of repeating the mistake.

This week's meeting will be Powell's second-to-last, unless Warsh isn't confirmed by May 15, at which point Powell could remain chair of the Fed's rate-setting committee until a replacement is named.

Even before the Iran war, problems had cropped up in both the inflation and jobs data, putting the Fed in a tight spot. Prices rose more quickly in January than in recent months, according to the Fed's preferred measure, with inflation excluding food and energy reaching 3.1% compared with a year earlier. That is little changed from where it was two years ago, a sign that prices are still rising at a stubbornly elevated pace.

Yet hiring has also stumbled. Businesses and other employers shed 92,000 jobs in February, the government reported earlier this month, an unexpectedly weak showing that followed an encouraging gain of 130,000 in January. The unemployment rate ticked higher to a still-low 4.4% from 4.3%.