US Federal Reserve keeps rates steady as Iran-driven inflation risks keep markets on edge

The US Federal Reserve kept interest rates unchanged on Wednesday, choosing to wait for clearer signs on inflation as renewed fighting linked to Iran keeps pressure on oil prices and clouds the outlook for the world’s largest economy. The Federal Open Market Committee held the benchmark rate at at 3.5% to 3.75% , in line with expectations. The decision came after a two-day meeting and was followed by a press conference by Fed Chair Kevin Warsh, his second policy meeting since taking charge of the central bank.

The decision comes at a difficult moment for the US central bank. Inflation has cooled from its earlier highs but remains above the Fed’s long-term 2% target. Consumer prices rose 3.5% year-on-year last month, and investors are worried that swings in oil prices linked to the Iran conflict could push inflation higher again.

Fed chooses patience

The Fed has been under pressure from two sides. Markets have been watching for signs of another rate hike because inflation is still above target. At the same time, President Donald Trump has repeatedly pressed the central bank to lower borrowing costs.


Warsh has said the Fed remains focused on price stability. With unemployment steady at around 4.2%, policymakers have made clear that inflation remains the bigger concern.

At the Fed’s previous meeting, half of policymakers said they expected at least one rate hike before the end of the year. That kept investors alert to the possibility of a move this week. Before the decision, markets were pricing in a more than 30% chance of an immediate rate increase, according to CME’s FedWatch tool.

The Fed, however, chose to hold for now, while keeping the door open for action later.

Matthew Ryan, Head of Market Strategy at Ebury, said the recent inflation reports have come in soft, while the labour market is in a ‘goldilocks’ state that provides no real urgency to hike.

Iran risk keeps inflation in focus

The renewed fighting around Iran has added to the Fed’s challenge because of its impact on oil prices. Energy prices can quickly feed into transport costs, consumer inflation and inflation expectations. The pause in military strikes over the weekend had brought some relief to oil prices, while recent US data did not justify a more aggressive move from the Fed.

Politics adds pressure

The meeting also took place under heavy political pressure. Trump has repeatedly criticised the Fed for not cutting rates. He had put pressure on Warsh’s predecessor Jerome Powell and attempted to remove Fed Governor Lisa Cook, though the Supreme Court blocked the move.

Warsh has insisted that he is not Trump's puppet. On Monday, Trump appeared to give him some room, saying Warsh had a board and needed the consent of others. The Fed’s challenge now is to preserve its inflation-fighting credibility while avoiding an unnecessary shock to the economy.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)