The Federal Reserve on Wednesday left its benchmark interest rate unchanged, marking the central bank’s third consecutive pause in 2026. The decision comes as the U.S. economy grapples with rising inflation due to the Iran war and fitful job growth.

The Fed maintained the federal funds rate — what banks charge each other for short-term loans — in its current range of 3.5% to 3.75%. The decision to keep rates steady was widely expected by investors, with the CME FedWatch tool forecasting a 100% probability that officials would maintain the current rate. 

In explaining its decision to maintain the current rate, the Federal Open Market Committee (FOMC), the Fed’s rate-setting panel, cited developments in the Middle East in pointing to “a high level of uncertainty about the economic outlook.” The central bank also said “elevated” inflation is tied to the “recent increase in global energy prices.”

Today’s meeting is likely to be Jerome Powell’s last as Fed chair, with his term set to expire on May 15 after eight years in the role. Earlier on Wednesday, the Senate Banking Committee voted to advance the nomination of Kevin Warsh, President Trump’s pick to lead the Fed, bringing him a step closer to succeeding Powell next month.

Warsh will inherit a Federal Reserve facing pressures ranging from President Trump’s repeated demands for lower interest rates to an inflation reading that jumped last month to its highest level in almost two years. Because interest rate cuts can spur inflation, many economists now predict the Fed will hold off on reductions until later in 2026 or even 2027.

“The FOMC met expectations and held rates steady today,” said Atsi Sheth, chief credit officer at Moody’s Ratings, in an email. “As the effects of the Middle East conflict become more pronounced, the case for maintaining policy rates rests on rising inflation risks, while risks to U.S. growth appear contained for now.”

In its statement, the FOMC reiterated its goal of achieving a 2% annual inflation rate. The Consumer Price Index stood at 3.3% in March.

“Given the current environment, we believe it’s unlikely the Fed will reduce interest rates in 2026, unless the economic fallout from higher energy prices becomes more severe or the labor market weakens significantly,” said Jerry Tempelman, former senior analyst at the New York Fed and vice president of economic and fixed income research at Mutual of America Capital Management, in an email before the Fed’s meeting.

No rate cuts in 2026?

The Fed last cut rates in December 2025, when the Consumer Price Index stood at 2.7% on an annual basis — above the Fed’s 2% target but down sharply from the pandemic-era high of 9.1% in June 2022. 

Since the Iran war began on Feb. 28, global energy costs have spiked, pushing the average U.S. price for a gallon of gasoline to $4.23 on Wednesday, about $1.25 more than before the conflict. Economists now forecast that April’s inflation rate could jump to 3.9% annually due to higher oil and gas prices, according to FactSet. 

“We’ve gone from being nearly halfway through the year with no rate cuts to that now becoming the base case for the rest of the year,” said Christian Hoffmann, head of fixed income, Thornburg Investment Management, in an email. “That could change quickly if the data shifts, but as of now, the market is pricing in less than a 25% chance of any cuts for all of 2026.”

Higher energy costs are leading some U.S. consumers to hold off on buying big-ticket items, noted Oxford Economics in an April 28 report. 

“We expect higher oil prices will hit consumers’ real disposable income growth and weigh on spending on durable goods and discretionary services the most,” the investment advisory firm said.  

A dip in spending would pose risks for the economy, which relies on consumer purchases for 70 cents of every $1 in gross domestic product.

Uneven job growth

The Fed is also keeping an eye on the labor market, which has idled amid economic uncertainty, uneven payroll gains and the emergence of artificial intelligence. 

Some companies have announced large layoffs, citing AI, although economists say the technology doesn’t yet appear to be causing widespread job cuts.

Signs of a weaker job market could persuade some Fed officials to dial back borrowing costs for consumers and businesses. Powell has recently described the employment market as relatively balanced, while acknowledging that young college grads face obstacles in finding work. 

“Any refinement in how the Fed describes labor market conditions, particularly wage pressures and hiring demand, could carry implications for expectations around future rate policy,” noted Ameriprise chief market strategist Anthony Saglimbene in an April 27 research note.