US stocks hold their losses after the Federal Reserve opts again not to cut interest rates

WASHINGTON (AP) — The Federal Reserve kept its key interest rate unchanged Wednesday and Chair Jerome Powell highlighted the increasingly uncertain outlook for the U.S. economy and inflation in the wake of the Iran war, suggesting the Fed could stand pat for an extended period.

Fed policymakers maintained their forecast for an additional rate cut this year, but in a news conference, Powell suggested that the central bank remains concerned about inflation that was still stubbornly elevated even before the conflict’s impact on gas prices.

“The thing I really want to emphasize is, nobody knows,” Powell said, referring to the impact of the Iran war. “The economic effects could be bigger, they could be smaller, they could be much smaller, they could be much bigger. We just don’t know.”

Powell said the central bank would need to see further progress in the price of goods declining as the impact of tariffs fades before cutting rates further. The Fed reduced its short-term rate three times last year to 3.6%, before pausing in January and on Wednesday.

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

Investors were discouraged by such comments, sending share prices sharply lower. The broad S&P 500 index dropped 1.4%.

Fed officials “are aware they’ve missed their inflation target for five years, and they do not want to continue to miss it indefinitely,” said Nathan Sheets, chief economist at Citi and a former top economist at the Fed. Inflation, according to the Fed’s preferred measure, was 2.8% in January, up from 2.3% nearly a year ago. It’s also above the Fed’s target of 2%.

At the press conference, Powell did clarify a key question about the Fed’s future: He said he has “no intention” of leaving the central bank until an investigation into his congressional testimony about the Fed’s building renovation is dropped.

Last Friday, a judge threw out a pair of subpoenas that the Justice Department had issued to the Fed, dealing a blow to the investigation. But U.S. Attorney Jeannine Pirro has said she will appeal the ruling.

Powell’s term as Fed chair is scheduled to end on May 15, and President Donald Trump has nominated a former top Fed official, Kevin Warsh, as his replacement. Warsh’s confirmation has been delayed because key Republican senators are opposed to the DOJ probe.

Once the investigation is resolved and even after Warsh is confirmed, Powell could elect to stay on the board to finish his term as a Fed governor, which lasts until January 2028. But he told reporters he had not yet decided whether to do so.

Powell also maintained a largely optimistic outlook for the economy, pointing out that in recent years it has been hit with numerous shocks — tariffs, the Fed’s own rate hikes in 2022 and 2023, the aftermath of the pandemic — and has avoided recession all along.

“The U.S. economy has been doing really well through a lot of challenges,” Powell said. “It’s been amazing to see.”

In the Fed’s quarterly economic projections, also released Wednesday, officials only modestly raised their forecasts for inflation, and now expect it will end this year at 2.7%, up from their 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 finish the year at 2.7%.

Fed officials slightly boosted their outlook for growth this year and expected unemployment to stay unchanged at 4.4%.

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

The Fed considers core prices a better measure of longer-run inflation. Consumer prices will spike higher in the coming months as gas prices have soared, but those increases could unwind by the end of the year, particularly if the conflict ends soon.

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

Gas prices jumped Wednesday to a nationwide 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.

Typically, the Fed would look past a supply shock like the disruption in oil supplies from the Middle East and its impact on inflation. Once it ends, any inflation it produces may fall back, without the Fed having to raise rates. As a result, the Fed could leave rates unchanged — or even cut them to boost weak hiring.

Even before the Iran war, problems had cropped up in both the inflation and jobs data, putting the Fed in a tight spot. Prices rose more quickly in January than in recent months, according to the Fed’s preferred measure, with inflation excluding food and energy reaching 3.1% compared with a year earlier. That is little changed from where it was two years ago, a sign that prices are still rising at a stubbornly elevated pace.

Yet hiring has also stumbled. Businesses and other employers shed 92,000 jobs in February, the government reported earlier this month, an unexpectedly weak showing that followed an encouraging gain of 130,000 in January. The unemployment rate ticked higher to a still-low 4.4% from 4.3%.

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Alex Veiga in Los Angeles contributed to this story.

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