Fed keeps rates unchanged as Middle East war clouds inflation outlook

The US Federal Reserve has held interest rates steady for a second consecutive meeting, despite pressure from President Donald Trump to cut rates. The decision comes as the ongoing Middle East conflict involving Iran has pushed oil prices higher, complicating the inflation outlook. Fed Chair Jerome H. Powell cautioned that rising energy costs could drive inflation upward in the near term, while noting that the extent and duration of this impact remain uncertain. Although the Fed had previously implemented three rate cuts in late 2025, the current environment has led policymakers to adopt a more cautious stance.

Projections from within the Fed indicate a divided outlook among officials. While a majority anticipate at least one rate cut later this year, others see no immediate need for further easing. The central bank is now navigating a complex trade-off: elevated oil prices could reignite inflation, while geopolitical tensions may slow economic growth and affect employment. This situation directly challenges the Fed’s dual mandate, reinforcing expectations of a wait-and-watch approach in the coming months.

At the same time, political pressure on the Fed has increased, with Donald Trump openly criticizing Jerome Powell and taking steps that could influence the institution’s leadership. Despite this, most economists believe the Fed has limited flexibility, with expectations that rates may remain unchanged or even rise if inflation continues to stay above the 2% target. While long-term inflation expectations remain relatively stable, recent data showing core inflation above 3% highlights the central bank’s cautious approach amid ongoing uncertainty.

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