Updated March 18, 2026 at 2:18 PM CDT
The Federal Reserve's balancing act is getting harder.
The central bank held its benchmark interest rate steady on Wednesday as policymakers face growing signs of a softening job market, even as the war in Iran puts more upward pressure on prices. That's leaving policymakers caught between competing goals of encouraging hiring, while also discouraging inflation.
"Uncertainty about the economic outlook remains elevated," Fed policymakers said in a statement. "The implications of developments in the Middle East for the U.S. economy are uncertain."
By a vote of 11 to 1, members of the Fed's rate-setting committee opted to leave the federal funds rate between 3-1/2 and 3-3/4%. The dissenting member, former White House economist Steven Miran, would have preferred to cut the benchmark by a quarter percentage point.
Committee members also signaled that, on average, they expect to cut rates just once this year—the same as they were forecasting in December.
At its previous meeting in late January, the Fed's rate-setting committee pointed to signs that the labor market was stabilizing. But that sunny outlook has been clouded by recent reports from the Labor Department, showing U.S. employers cut 92,000 jobs in February as the unemployment rate inched up to 4.4%. Job gains for December and January were also revised downward. That means the economy has added virtually no jobs in the last six months.
Meanwhile, the war with Iran has disrupted global energy markets, driving gasoline and diesel prices sharply higher in the last 2 1/2 weeks. While the Fed typically pays less attention to changing energy prices, since they bounce up and down frequently, a sustained jump in the cost of diesel fuel would raise the cost of transporting numerous goods that move by truck or train.
"It's going to put big, upward pressure on inflation in the near term," said Michael Pearce, chief U.S. economist for Oxford Economics, a global forecasting and advisory firm. "At the same time, it's going to affect the real economy. That rise in prices is going to restrain the pace of consumer spending. The policy outlook this year I think has been completely scrambled by this new shock."
Even before the war began, January's inflation rate was clocked at 3.1% according to the Fed's preferred measure — well above its 2% target. A report released Wednesday on wholesale inflation in February also came in hotter than expected.
Updated forecasts released at the end of Wednesday's meeting show that Fed policymakers are projecting somewhat higher inflation and now than they were in December.
Questions about Fed leadership
The Fed's balancing act comes as Jerome Powell's term as Fed chairman is set to end in May, but the timetable to confirm his replacement is still up in the air.
President Trump has nominated Kevin Warsh to succeed Powell, but Sen. Thom Tillis, R-N.C., has promised to block that until the Justice Department drops a criminal probe of the central bank.
Last week, a federal judge quashed two subpoenas the Justice Department had directed at the Fed, ruling they were part of an improper harassment campaign designed to force Powell and his colleagues to lower interest rates. Tillis wrote in a social media post that the ruling "confirms how weak and frivolous" the investigation is. But so far, the Justice Department has refused to drop the case.
If Warsh's confirmation is held up, Powell, who has been the target of repeated attacks by President Trump, may remain in the chair's position into the summer. He also has the option to remain on the Fed's board of governors until 2028.
"That would be highly unusual, but then what's also unusual is an ongoing criminal probe into a sitting Federal Reserve chair," Pearce said. "And I think he sees it as part of his mission and part of his legacy, in defending the independence of the Federal Reserve from this political influence."
Powell said Wednesday he would remain on the board as long as the Justice Department probe continues. He said he has not made a decision about staying on the board beyond that, but added he will be guided by what's in the best interest of the institution and the people the Fed serves.
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