Federal Reserve decision live: Fed sticks with plans to cut rates even as Iran war sends energy prices soaring
The Federal Reserve has signalled cuts to interest rates this year even as the surge in oil prices triggered by the war in Iran threatens to ignite a fresh burst of inflation.
The rate-setting Federal Open Market Committee said on Wednesday after holding the benchmark federal funds target range at 3.5 to 3.75 per cent that “the implications of developments in the Middle East for the US economy are uncertain”.
In fresh economic projections, Fed officials signalled that they expected to make one quarter-point cut before the close of 2026 — in line with its previous quarterly projections in December. Twelve of the 19 members of the FOMC predicted at least one cut, against seven who said borrowing costs would end the year where they are now.
Markets had sharply cut their expectations for rate cuts in the lead-up to Wednesday’s meeting, with federal funds futures showing traders pricing in no reduction in rates until mid-2027.
US government bonds traded in a tight range following the decision, with the yield on the two-year note up 0.03 percentage points at 3.7 per cent. Wall Street’s S&P 500 share index was at its low for the day, down 0.8 per cent.
Fed governor Stephen Miran was the sole dissenter from the decision to hold borrowing costs for the second meeting in a row, with the ally of President Donald Trump backing a quarter-point cut.
The decision to hold borrowing costs was widely expected even before US oil prices jumped almost 50 per cent after the US and Israel’s first attacks on Iran at the end of February, sending the costs of petrol and diesel at the pump zooming higher.
The Iran conflict has placed the Fed in a delicate balancing act over whether to prioritise its fight against price pressures over further signs of weakness in the US labour market.
The Bureau of Labor Statistics said the US lost 92,000 jobs last month, with several large companies announcing plans to lay off workers in recent weeks.
Headline personal consumption expenditures inflation remains above the Fed’s 2 per cent goal at 2.8 per cent. The central bank has not managed to hit its inflation target since 2021, raising concerns that the fresh wave of price pressures from higher oil prices will erode its credibility to keep price pressures under control.
The FOMC’s latest quarterly economic projections showed that officials now anticipate headline inflation at 2.7 per cent by the end of 2026 — against a December estimate of 2.4 per cent. Core PCE inflation, which excludes food and energy prices, would also end the year at 2.7 per cent, compared with the December estimate of 2.5 per cent.
Growth was set to come in slightly higher — at 2.4 per cent — compared with the December estimate of 2.3 per cent.
Tehran has largely closed the Strait of Hormuz, a waterway through which one-fifth of the world’s oil flows, in retaliation for the strikes on Iran, pushing up the price of US benchmark West Texas Intermediate to around $95 a barrel.
The disruption has caused a global supply crunch and is hitting US consumers and businesses despite the US’s role as a major energy producer. Petrol and diesel prices are now at their highest level in either of Trump’s terms in the White House.
