Washington (United States) (AFP) – The US Federal Reserve raised its outlook for inflation as it held interest rates steady on Wednesday, citing an “uncertain” economic outlook due to the war in Iran. The 11-1 vote on the benchmark rate was widely expected, but nonetheless defied US President Donald Trump’s demands for a rate cut as the world’s largest economy battles stubborn inflation and weak labor demand. Rates were kept steady at a range of 3.50 percent to 3.75 percent, with officials flagging one expected rate cut by the end of the year.
Speaking to reporters, Fed Chair Jerome Powell said he expected higher energy prices from the war in the Middle East to boost inflation in the near term, though he added that further economic impacts remain uncertain. “The implications of events in the Middle East for the US economy are uncertain,” Powell told a press briefing after the policy meeting. “In the near term, higher energy prices will push up overall inflation, but it is too soon to know the scope and duration of the potential effects on the economy,” he said.
Powell refused to be drawn on sharing specifics of his outlook for how the war could affect the US economy. “We’re right at the beginning of this, and we don’t know how big — you just don’t know how big this will be and how long it lasts,” he said, adding that the Fed would have to “wait and see.” Trump has repeatedly insulted and criticized Powell for not cutting rates, and in January the Fed chair revealed that the US Justice Department had opened an investigation into him related to cost overruns on a building renovation project.
On Wednesday, Powell was adamant that he would not leave the board when his term as chair is over in May — his tenure as governor continues until 2028 — until the investigation is completed. “I have no intention of leaving the board until the investigation is well and truly over, with transparency and finality,” Powell said.
– Stubborn inflation –
The central bank had cut rates three consecutive times late last year before holding them steady at its January meeting. It has a dual mandate of maintaining inflation near a long-term target of two percent while ensuring maximum employment. With war in the Middle East causing global oil prices to spike, potentially fuelling widespread inflation and curbing growth, analysts said policymakers were unlikely to make any immediate moves.
Affordability has been a key political issue for Trump, who has repeatedly called for rates to be slashed even as price increases have remained stubbornly high. “Uncertainty about the economic outlook remains elevated,” the Fed said Wednesday, while noting that economic activity was “expanding at a solid pace.” “Job gains have remained low, and the unemployment rate has been little changed in recent months. Inflation remains somewhat elevated.”
The Fed also released its quarterly summary of economic projections, expecting fourth-quarter GDP growth to come in at 2.4 percent year-on-year. The Fed raised its inflation outlook, now expecting the personal consumption expenditure (PCE) measure to stand at 2.7 percent by December 2026, up from an earlier estimate of 2.4 percent.
– Single dissenting vote –
The knock-on effects of the war in Iran, particularly oil supply shocks, have dominated headlines since the United States and Israel launched strikes on February 28. Central banks tend to ignore the inflation effects of short-term price shocks, but it is unclear how long the war will last. Before the war, a rate cut was expected as soon as this summer, with another possible later in the year. The only dissenting voice on Wednesday came from Fed Governor Stephen Miran, a close ally and former economic advisor of Trump, who voted for a quarter-point cut to interest rates. The statement defied analyst expectations of a more fragmented Fed, since the central bank’s two mandates are potentially in conflict with one another.
© 2024 AFP
