Photo: Alamy
Federal Reserve officials expect the war involving Iran to push inflation higher this year while having a limited impact on economic growth, though policymakers still anticipate cutting their key interest rate in 2026.
The central bank left short-term interest rates unchanged on Wednesday for the second straight meeting, keeping them at about 3.6 percent.
In a statement, the Federal Reserve said the “implications of developments in the Middle East for the U.S. economy are uncertain.”
Despite the uncertainty, policymakers maintained their previous plans for a rate cut next year. The unchanged forecast suggests officials expect the surge in gas prices linked to the conflict to have only a temporary impact on inflation and the economy.
Federal Reserve officials also expect unemployment to remain roughly unchanged by the end of this year, a more optimistic outlook than many private economists have predicted.
The central bank now expects inflation to reach 2.7 percent by the end of the year, slightly below the 2.8 percent rate recorded in January but higher than the forecast issued in December.
Officials also project core inflation, which excludes volatile food and energy prices, will end the year at 2.7 percent, up from a previous estimate of 2.5 percent. The Fed considers core inflation a better indicator of long term price trends.
Policymakers expect inflation to fall to about 2.2 percent by 2027 and reach the Fed’s 2 percent target by 2028.
Gas prices have risen sharply as the conflict has disrupted global energy markets. According to AAA, the national average price for regular gasoline reached $3.79 per gallon on Tuesday, up 88 cents from a month earlier.
Higher fuel prices could temporarily push inflation higher, but might also slow economic growth if consumers reduce spending in other areas. A prolonged surge in energy prices could also raise unemployment if businesses cut back on hiring or reduce operations.
The meeting also comes near the end of Federal Reserve Chair Jerome Powell’s term, which expires May 15. President Donald Trump has nominated former Federal Reserve official Kevin Warsh to succeed him.
