US Fed leaves interest rates unchanged, expects inflation to rise

[WASHINGTON] The US central bank held interest rates steady on Wednesday (Mar 18) and projected higher inflation, steady unemployment and a single reduction in borrowing costs this year, a path that US Federal Reserve chair Jerome Powell said was subject to unusually high uncertainty as policymakers take stock of the impact of the US and Israeli war with Iran.

“In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy,” Powell said in a press conference following the Fed’s 11-1 decision to maintain its benchmark overnight interest rate in the 3.5 to 3.75 per cent range. “The thing I really want to emphasise is that nobody knows: the economic effects could be bigger, they could be smaller; they could be much smaller or much bigger; we just don’t know.”

New projections showed Fed policymakers as a group expect to cut the policy rate by a quarter of a percentage point by the end of this year, a view that on the surface was unchanged from their last set of projections in December.

Powell noted, however, that individual projections show a “meaningful” number of policymakers are pencilling in less easing this year than they did three months ago.

And the possibility that the Fed’s next move “might be an increase did come up at the meeting as it did at the last meeting”, Powell said, though he added that the “vast majority” of the officials do not have that outcome as their base case.

Monetary policy, he repeated, is “well positioned to determine the extent and timing of additional adjustments to our policy rate based on the incoming data, evolving outlook, and the balance of risks”.

Powell’s remarks prompted traders to pile into bets that the Fed will wait until next year to cut rates. US stocks slumped, with the S&P 500 index falling about 1.4 per cent to its lowest close in nearly four months.

The US dollar jumped against a basket of currencies while US Treasury yields rose. The Fed is in the difficult position of needing to balance the risk of higher inflation amid a fresh shock and downside risks to the labour market, said Powell, whose term as Fed chief ends in May.

“I wouldn’t say that it’s clear at all that one is more at risk than the other.”

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One Fed policymaker dissents

Fed policymakers now expect inflation, as measured by the central bank’s preferred gauge, to end the year at 2.7 per cent, not far below the current rate and higher than the 2.4 per cent projected in December, reflecting fallout from the spike in global oil prices that followed the start of the bombing campaign against Iran. But the higher inflation projections also are due to stickier tariff-driven inflation slowing progress towards the Fed’s 2 per cent inflation goal, Powell said.

“The thing that’s really important that we see this year is progress on inflation through a reduction in goods inflation,” he said.

The new rate and economic projections showed the Fed, for now, largely looking through the oil shock, with policymakers still expecting to lower rates this year and anticipating inflation to be 2.2 per cent by the end of 2027.

Notably, no policymakers saw rates needing to move higher by the end of this year, though one official anticipated a rate hike in 2027.

Economic growth was upgraded slightly, to 2.4 per cent for 2026 versus 2.3 per cent in December, and the projected unemployment rate was unchanged at 4.4 per cent.

Fed governor Stephen Miran continued his string of dissents, voting against the policy decision in favour of a rate cut.

Policy statement largely unchanged

The decision to hold the policy rate steady was widely expected in financial markets, but the projections provide fresh information about how the US central bank is assessing the economic impact of a war that has disrupted global oil markets.

Oil prices have jumped from below US$80 a barrel to US$108 ahead of the Fed’s policy decision, with US petrol prices also spiking and new inflation data showing wholesale prices rising faster than expected even before the conflict began.

Other than the reference to the war, the Fed’s new statement was little changed from the one issued at the end of its Jan 27 to 28 meeting. REUTERS