Fed Holds Rates at 3.5% to 3.75% as Iran War Clouds the Outlook

The Federal Reserve left its benchmark interest rate unchanged on Wednesday, its second consecutive pause in 2026, saying economic uncertainty remains elevated and the effects of the Iran war are unclear, according to CBS News and NPR. The federal funds rate stays in a range of 3.5% to 3.75%, a decision investors widely expected, CBS News reported.

The vote was 11 to 1, NPR reported. The dissenter, Steven Miran, a former White House economist, preferred a quarter-point cut. Fed officials signaled on average that they still expect one cut in 2026, the same as in December, which CBS News read as a sign that policymakers expect the energy-price spike to have a transitory effect on inflation. Before the war began Feb. 28, economists had penciled in the next cut for June, but the odds are now seen as slim, according to CME FedWatch data cited by CBS News.

Updated forecasts show slightly higher inflation. Officials now expect inflation of 2.7% by the end of 2026, up from 2.4% in December, and core inflation of 2.7%, up from 2.5%, CBS News reported. NPR noted that the Fed’s preferred inflation gauge ran at 3.1% in January, well above its 2% target, before the war, and that a Labor Department report Wednesday showed wholesale prices in February coming in hotter than expected. CBS News said the producer price index rose 3.4% from a year earlier, the biggest increase in a year.

At a press conference, Chair Jerome Powell stressed how much remains unknown. “The thing I want to emphasize is nobody knows,” he said, adding that a long stretch of much higher gas prices would weigh on consumption, but it is not clear that will happen, CBS News reported. He also said the energy increase will push up inflation in the near term. “If we don’t see progress on inflation, we won’t see a rate cut,” Powell said, as quoted by analyst Mark Vickery in CBS News. Powell added that he believes the economy is “doing pretty well” despite uncertainty.

The Fed is caught between its two goals. NPR reported that February’s loss of 92,000 jobs, with a 4.4% unemployment rate and downward revisions to December and January, means the economy has added virtually no jobs in six months, while energy costs rise. Michael Pearce, chief U.S. economist at Oxford Economics, told NPR the war will put “big, upward pressure on inflation in the near term” and also restrain consumer spending, so that the policy outlook “has been completely scrambled.” Stocks fell: the S&P 500 dropped 1.4% to close at 6,625, the Dow lost 1.6% and the Nasdaq 1.5%, CBS News reported.

Leadership was also in question. Powell’s term as chair ends in May, and President Donald Trump has nominated Kevin Warsh to succeed him, but Sen. Thom Tillis, R-N.C., has promised to hold up confirmation until the Justice Department drops its criminal probe of the central bank, NPR reported. A federal judge quashed two subpoenas in that probe last week, but the department has refused to drop it, NPR said. Powell told reporters, “I have no intention of leaving the board until the investigation is well and truly over with transparency and finality,” NBC News reported. He said he has not decided whether to stay as a governor, a post whose term runs to 2028, after the probe ends and a successor is confirmed, and that he would serve as chair pro tempore if Warsh is not confirmed by May.