The Federal Reserve left interest rates unchanged on Wednesday, choosing to stay cautious as policymakers weigh stubborn inflation, mixed labor market signals, and the growing economic uncertainty linked to the war with Iran.

In a decision that markets had largely expected, the Federal Open Market Committee voted 11-1 to keep the benchmark federal funds rate within the 3.5% to 3.75% range. Although this rate directly applies to overnight bank lending, it also influences borrowing costs across the broader economy, from mortgages to business loans.

In its latest statement, the Fed made only limited adjustments to its broader economic assessment, though updated projections showed slightly stronger growth and somewhat higher inflation expectations for 2026.

Even with uncertainty still elevated, policymakers continued to signal that rate cuts are likely over time. The committee’s updated dot plot showed a median expectation for one cut this year and another in 2027, though officials gave no clear indication of when those moves might happen. Among the 19 participants, seven now expect no rate cuts at all this year, one more than in the December projections. Beyond that, forecasts remain spread out, although the longer-run policy rate is still seen settling near 3.1%.

Financial markets reacted negatively after the announcement, with equities falling to session lows as investors focused on the Fed’s concern that inflation may remain stubbornly high. Comments from Chair Jerome Powell reinforced that message.

A major source of uncertainty is the conflict with Iran, now approaching its third week. Fighting in the region and disruption around the Strait of Hormuz have unsettled global energy markets and raised concerns that higher oil prices could delay progress on inflation. The Fed acknowledged this directly in its statement, noting that developments in the Middle East could have unclear consequences for the U.S. economy.

Powell echoed that caution during his press conference, saying it remains too early to determine the full impact of the conflict. He added that short-term inflation expectations have moved higher in recent weeks, largely because oil prices have risen sharply amid supply disruptions in the region.

Not everyone on the committee agreed with the decision. Governor Stephen Miran again dissented in favor of a quarter-point rate cut, pointing to growing unease about labor market conditions. Governor Christopher Waller, who had supported a cut earlier this year, voted this time to keep rates unchanged.

Before the outbreak of the conflict, markets had been pricing in two rate cuts this year, with some chance of a third. Those expectations have since been scaled back sharply as oil prices surged and inflation data remained firm, even before the latest energy shock took hold.

The Fed’s updated economic forecasts showed a somewhat stronger outlook for growth. Officials now expect U.S. GDP to expand by 2.4% this year, slightly above the level projected in December, with 2027 growth also revised higher to 2.3%. At the same time, inflation estimates were raised. Policymakers now see both headline and core PCE inflation at 2.7% this year, though they still expect inflation to move closer to the Fed’s 2% target in the years ahead as the effects of tariffs and war-related disruptions fade. The unemployment rate is still projected to end the year at 4.4%, despite recent signs of softer payroll growth.

The decision also comes amid intensifying political pressure. President Donald Trump has continued urging the Fed to cut rates, recently criticizing Powell for not calling a special meeting despite mounting economic uncertainty.

Powell’s own future has also become part of the story. His term as Fed chair is scheduled to end in May, and Trump has nominated former Fed Governor Kevin Warsh to succeed him. Warsh is generally seen as favoring lower interest rates, though he has not made recent public comments outlining his current policy views.

Adding to the tension is an ongoing legal and political dispute involving the Justice Department. U.S. Attorney Jeanine Pirro has sought evidence related to the Federal Reserve’s costly headquarters renovation, issuing subpoenas to Powell. Powell has pushed back, arguing that the effort is being used to pressure the central bank into easing policy. A judge recently sided with Powell and threw out the subpoenas, though Pirro has said she plans to appeal.

That dispute could complicate the transition to new leadership. Senator Thom Tillis has said he may block Warsh’s confirmation until the issue surrounding Powell is resolved. If the legal battle continues beyond May, Powell could remain in place until a successor is formally confirmed.

Speaking on the matter, Powell said he does not intend to leave the Board while the investigation remains unresolved, stressing the need for transparency and a clear outcome. Beyond that, he said he has not yet decided what he will do once the matter is settled, and that any decision will be based on what he believes is best for the institution and the public it serves.

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