Federal Reserve holds a key interest rate steady amid growing economic pressures

MARY LOUISE KELLY, HOST:

Policymakers at the Federal Reserve held interest rates steady this afternoon. They are wrestling with an economic outlook that is even more uncertain than usual. The U.S. war with Iran has triggered a spike in energy prices. At the same time, the job market appears to be weakening, and that is a challenge for the central bank because they are charged with keeping both inflation and unemployment in check. NPR's Scott Horsley is here. Nice to see you, Scott.

SCOTT HORSLEY, BYLINE: Hi, Mary Louise.

KELLY: So you come to us not bearing earth-shattering headlines today. They're doing nothing. They're holding interest rates steady. How does that bode for the rest of the year?

HORSLEY: Well, on average, policymakers signaled they expect only one interest rate cut in all of 2026, which is about what they were forecasting back in December. Their guesses really haven't moved much in the last three months. They expect a little bit higher inflation now and a little bit stronger economic growth. But Fed Chairman Jerome Powell says there's just a big question mark associated with a lot of those forecasts. So much is up in the air right now. Central bankers are just, you know, taking their best shot and keeping their fingers crossed behind their backs.

KELLY: The war that we mentioned and how it is affecting energy prices - do we know how much that is affecting the Fed's thinking here?

HORSLEY: Well, obviously, it's affecting everyone's attitudes about the cost of living right now. We've seen gasoline prices jump more than $0.80 a gallon in just the 2 1/2 weeks since the war began. The price of diesel fuel's gone up more than a buck and a quarter. Powell and his colleagues do think that will have some spillover effects and raise the cost of other goods, but they just don't know by how much.

JEROME POWELL: Nobody knows. You know, the economics effect could be bigger. They could be smaller. They could be much smaller or much bigger. We just don't know.

HORSLEY: A lot will depend, of course, on how long the war goes on and when energy traffic starts flowing normally again through the Strait of Hormuz.

KELLY: Which are two big questions. OK, we've had gloomy jobs reports these last few months. How worried are Fed policymakers about that?

HORSLEY: Most of them don't seem overly concerned about the job market, which is why they're not in a rush to cut interest rates. Even though employers have added virtually no jobs over the last six months, Powell says the unemployment rate has barely budged.

POWELL: Effectively, there's zero net job creation in the private sector. But actually, that looks like that's about what the economy needs in terms of dealing with very, very low - nonexistent, really - growth in the labor force, which, of course, we've never had in our history.

HORSLEY: The economy is not adding a lot of jobs, but it's also not adding a lot of workers, which is very unusual. And it's a result of the president's immigration crackdown, as well as the large number of baby boomers who are retiring.

KELLY: Let me ask about personnel drama. President Trump has made clear he is keen to replace Powell as Fed chairman. How's that effort going?

HORSLEY: Well, the timeline is still up in the air. The Justice Department is investigating the Fed ostensibly over cost overruns at its headquarters here in Washington. And even though a federal judge said last week that's just a pretext and that the investigation is really part of an improper pressure campaign by the president to get the Fed to lower interest rates, the probe itself has not gone away. And so long as that's the case, the Senate is not likely to vote on a successor to Powell, so he's likely to remain in the chairman's seat.

POWELL: I have no intention of leaving the board until the investigation is well and truly over with transparency and finality.

HORSLEY: Now, Powell has not said - Powell says he has not decided, rather, whether he'll stay on the Fed's governing board after the probe is over. And after there's a new chairman in place, he could stay for another year and a half. That would be very unusual, but Powell might decide to do that in an effort to safeguard the central bank's independence from presidential pressure.

KELLY: NPR's Scott Horsley, thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

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