US Fed leaves rates unchanged despite higher inflation
The US Federal Reserve has kept interest rates steady and forecast higher inflation, stable unemployment and only a single drop in borrowing costs this year as officials assess economic risks from the US and Israel’s war with Iran.
New forecasts from US central bank policymakers showed the Fed’s benchmark overnight interest rate will fall by just a quarter point by the end of this year; but there is no clue as to the timing of such a move.
All but one of the Federal Reserve’s 12 voting members voted to keep interest rates in the 3.5 to 3.75 percent range.
That view remains unchanged from previous forecasts and remains incompatible with President Donald Trump’s demand for a sharp reduction in borrowing costs.
US stocks pare losses slightly following Fed policy statement and forecasts; The S&P 500 index lost about 0.6 percent and the Nasdaq Composite lost about 0.5 percent.
While the dollar regained its previous gains, the dollar index rose 0.27 percent. US Treasury bond yields also regained their gains, with the 10-year bond yield rising to 4.214 percent.
Inflation, measured by the Fed’s preferred indicator, was expected to end the year at 2.7 percent; this rate is not far below the current rate and was above the 2.4 percent projected in December; this was likely a reflection of the rise in global oil prices following the start of the bombing campaign against Iran.
“The effects of developments in the Middle East on the US economy are uncertain,” the Fed said in its policy statement, which also noted continued stable unemployment.
At the press conference held after the outcome of the FOMC meeting, Fed Chairman Jerome Powell reiterated the uncertainty created by the war in terms of the outlook.
“In the near term, higher energy prices will increase overall inflation, but it is too early to know the scope and duration of potential impacts on the economy,” he said.
He added that monetary policy “is well positioned to determine the scope and timing of further adjustments to our policy rates based on incoming data, the evolving outlook and the balance of risks.”
The new interest rate and economic forecasts showed that the Fed has largely recovered from the oil shock for now, with policymakers still expecting to cut interest rates this year and expecting inflation to be 2.2 percent by the end of 2027, near the central bank’s 2.0 percent target.
It’s notable that no policymakers think rates should rise higher by the end of this year, although one official predicted a rate increase in 2027.
Economic growth increased slightly to 2.4 percent for 2026 from 2.3 percent in December, and the projected unemployment rate remained unchanged at 4.4 percent.
The decision to keep the policy rate steady was widely expected in financial markets, but the forecasts provide new insight into how the US central bank is assessing the economic impact of a war that has disrupted global oil markets.
Oil prices rose from below US$80 (US$A113) to US$108 (US$A153) per barrel ahead of the Fed’s policy decision; U.S. gasoline prices have also skyrocketed, and new inflation data shows wholesale prices are rising faster than expected even before the conflict began.
The Fed’s new statement did not differ much from the statement issued at the end of the January 27-28 meeting, except for the reference to the war.
Australia’s Associated Press is the beating heart of Australian news. AAP is Australia’s only independent national news channel and has been providing accurate, reliable and fast-paced news content to the media industry, government and corporate sector for 85 years. We inform Australia.
