With one eye on the growing risk of an inflationary oil shock, the Federal Reserve held its benchmark interest steady between 3.5% to 3.75% at the conclusion of its most recent meeting Wednesday.
The vote by the Federal Open Market Committee to keep rates unchanged was 11 to 1, with only Stephen Miran, who was appointed to the Fed last fall by President Trump, voting to cut rates by a quarter of a point.
In a statement, the committee said the economy continues to expand at a "solid pace," with stable employment despite an anemic labor market and a "somewhat elevated" inflation rate.
The committee briefly nodded toward the major, potentially transformative news of the day - the closure of the Strait of Hormuz and the resulting spike in oil prices - but left the details largely unaddressed, saying simply: "The implications of developments in the Middle East for the US economy are uncertain."
Inflation expectations: At a news conference Wednesday afternoon, Fed Chair Jerome Powell said that it is too soon to know how the spike in oil prices will affect the economy. But he left no doubt that Fed officials expect to see an oil shock of some kind, with the question being how long it lasts and how great an effect it produces.
At the moment, Fed officials seem to think the oil shock will be relatively brief, though powerful enough to boost topline inflation to 2.7% on average in 2026, up from the 2.4% inflation level they projected in December.
The higher inflation projections come against a backdrop of rising inflation. The Labor Department reported Wednesday that wholesale prices rose 0.7% in February compared with the month before, and 3.4% over the previous year. The results were higher than expected and point to rising inflationary pressure even before an oil shock of unknown strength and duration hits the economy.
Powell noted that core inflation hit 3% in the most recent data, driven in large part by the tariffs Trump placed on imported goods last year. Fed officials are still waiting to see more progress in reducing goods inflation, Powell said.
At the same time, Powell said there is a tendency among economists to "look through" oil shocks because they are usually transitory, and the latest economic projections indicate that they are largely doing that. Fed officials now expect economic growth to be slightly stronger this year (2.4% GDP growth, up from a previous estimate of 2.3%) and the unemployment rate to hold steady at 4.4%. And officials still expect to cut rates one time this year, the same projection as before.
Overall, Fed officials are cautiously optimistic, though that could change depending on what happens in the Middle East. "The U.S. economy is doing pretty well," Powell said. "It's just we don't know what the effects of this will be and really no one does."
What analysts are saying: The highly uncertain nature of the burgeoning oil crisis led many analysts to join Fed officials in taking a cautious approach.
"The Federal Reserve ... once again held rates steady against a mixed backdrop of elevated inflation, a weaker labor market, and stable growth (for now)," Matthias Scheiber, a portfolio manager at Allspring Global Investments, said in a note to clients. "Amid rising geopolitical risk, time will tell how U.S. fundamentals are affected."
William English, a former senior Fed economist, said the risk appears to be on the inflation side of the equation. Fed officials still "had some elbow room to cut" interest rates when tariff-related inflation started showing up last year, English told The Wall Street Journal, but that's no longer the case. "There's at least a bit of a risk that they end up with policy that's easier than they're comfortable with, not because they cut, but because inflation went up," he said.
The most important fact about the Fed today, though, may be that its outlook changed so little. "The Fed wants to wait and see what's happening in the Middle East," said University of Michigan economist Justin Wolfers. "There's no point taking a strong view until reality becomes clearer. (Powell just described FOMC members as having 'no conviction' in their forecasts.)"
Powell says he'll stay on until DOJ investigation is done: The Fed chair said he has "no intention" of leaving the bank until an investigation into his testimony before Congress about ongoing renovations to Fed headquarters is closed. A judge last week blocked the Justice Department's attempt to subpoena Fed records, but U.S. Attorney Jeanine Pirro, the former Fox News host appointed as the top federal prosecutor in D.C. by President Trump, has said she will appeal.