Fed Projects Rate Cut This Year as Powell Vows to Stay Until Justice Department Probe Ends

WASHINGTON (AP) — Federal Reserve officials expect the Iran war to worsen inflation this year and have 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 around 3.6%. In a statement, the central bank said the “implications of events in the Middle East for the U.S. economy are uncertain.”

Still, by maintaining their forecast for a rate cut this year and next (the same projections they made in December), central bank policymakers appear to expect the gas price increase due to the Iran war to have a largely temporary effect on inflation and the economy. Officials also expect unemployment to remain unchanged by the end of this year, a more optimistic outlook than most outside economists.

Whether that turns out to be true will depend largely on the duration of the conflict in the Middle East. Officials expect inflation to fall back to 2.2% in 2027 and reach the Federal Reserve’s 2% target in 2028.

Speaking to reporters after the rate decision was announced, Federal Reserve Chair Jerome Powell maintained a largely optimistic outlook, noting that the economy has been hit by numerous shocks in recent years (tariffs, the Fed’s own rate hikes in 2022 and 2023, the aftermath of the pandemic) and has avoided recession at every turn.

“The U.S. economy has done very well despite many challenges,” Powell said. “It’s been amazing to see.”

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Powell did clarify a key question about the future of the Federal Reserve: He said he has “no intention” of leaving the central bank until an investigation into his congressional testimony on the renovation of the Federal Reserve building is dropped. Last Friday, a judge threw out a pair of subpoenas that the Justice Department had issued to the Federal Reserve, dealing a blow to the investigation. But federal prosecutor Jeannine Pirro has said she will appeal the ruling.

Powell’s term as Federal Reserve chair is scheduled to end on May 15, and President Donald Trump has nominated a former top Federal Reserve official, Kevin Warsh, as his replacement. Warsh’s nomination has been delayed in the Senate because key Republican senators oppose the Justice Department investigation.

Once the investigation is resolved and even after Warsh is confirmed, Powell could choose to remain on the board until the end of his term as Fed governor, which lasts until January 2028. But he told reporters he had not yet made that decision.

With the future of the economy so uncertain, Powell stressed that any additional rate cuts this year were hardly assured.

“The rate forecast is conditional on the performance of the economy, so if we don’t see that progress then we won’t see the rate cut,” he said.

In the Federal Reserve’s quarterly economic projections, also released Wednesday, officials only modestly raised their inflation forecasts, and now expect it to end this year at 2.7%, up from its 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 end the year at 2.7%.

Federal Reserve officials slightly upgraded their growth outlook for this year and expected unemployment to remain unchanged at 4.4%.

Tim Duy, chief economist at SGH Macro, said the forecasts were essentially “outdated” as policymakers avoided fully taking into account the impacts of the Iran war on the economy.

The Federal Reserve considers core prices to be a better measure of long-term inflation. Consumer prices will rise in the coming months as gas prices have skyrocketed, but those increases could slow toward the end of the year, particularly if the conflict ends soon.

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

On Wall Street, stock losses deepened following the Federal Reserve’s decision. The S&P 500 fell 1.4% and the Dow Jones Industrial Average fell 768 points, or 1.6%.

Gasoline prices rose Wednesday to a national 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.

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Normally, the Federal Reserve would ignore a supply shock such as the disruption of Middle East oil supplies and its impact on inflation. Once it ends, any inflation it produces can recede, without the Federal Reserve having to raise rates. As a result, the Federal Reserve could leave rates unchanged, or even cut them to boost weak hiring.

However, as the economy emerged from the pandemic in 2021, inflation soared as Americans dramatically increased their spending, helped by stimulus checks and pandemic-era savings. Powell initially said inflation would be “transitory” and would fade as the economy returned to normal. Instead, it hit its highest level in four decades in June 2022. With inflation still elevated, many Fed officials fear repeating the mistake.

This week’s meeting will be Powell’s next to last, unless Warsh is not confirmed by May 15, at which time Powell could continue to chair the Fed’s rate-setting committee until a replacement is named.

Even before the Iran war, problems had arisen in both inflation and employment data, putting the Federal Reserve in a difficult situation. Prices rose faster in January than in recent months, according to the Federal Reserve’s preferred measure, and inflation excluding food and energy reached 3.1% compared with a year earlier. The situation has changed little from two years ago, a sign that prices continue to rise at a stubbornly high pace.

However, hiring has also stumbled. Businesses and other employers cut 92,000 jobs in February, the government reported earlier this month, an unexpectedly weak result that followed an encouraging increase of 130,000 in January. The unemployment rate rose to a still low 4.4% from 4.3%.