Fed keeps key rate unchanged as Powell vows to stay until DOJ investigation is finished

The Federal Reserve maintained its key interest rate Wednesday as Chair Jerome Powell highlighted increasing uncertainty facing the U.S. economy following the outbreak of the Iran war, suggesting the central bank might keep rates steady for an extended period.

During his news conference, Powell emphasized the unpredictable economic impact of the Middle East conflict. “The thing I really want to emphasize is, nobody knows,” Powell stated regarding the war’s economic effects. “They could be bigger, they could be smaller, they could be much smaller, they could be much bigger. We just don’t know.”

While Fed policymakers maintained their forecast for one additional rate cut this year, Powell indicated that stubborn inflation remains a concern. The Fed’s benchmark rate currently stands at 3.6% after three cuts last year, followed by pauses in January and now March.

“The rate forecast is conditional on the performance of the economy, so if we don’t see that progress then you won’t see the rate cut,” Powell explained, noting that the central bank needs to see further declines in goods prices as tariff impacts fade before implementing additional cuts.

Investors reacted negatively to Powell’s cautious tone, with the S&P 500 dropping 1.4% following his comments. Market participants had hoped for clearer signals about future rate reductions.

Nathan Sheets, chief economist at Citi and former Fed economist, observed that Fed officials “are aware they’ve missed their inflation target for five years, and they do not want to continue to miss it indefinitely.” Inflation according to the Fed’s preferred measure stood at 2.8% in January, up from 2.3% nearly a year ago and still above the Fed’s 2% target.

Powell addressed his own future at the central bank, stating he has “no intention” of leaving until an investigation into his congressional testimony about the Fed’s building renovation is concluded. Last Friday, a judge rejected Justice Department subpoenas to the Fed, though U.S. Attorney Jeannine Pirro has indicated she will appeal that ruling.

This leadership question comes as President Donald Trump has nominated former Fed official Kevin Warsh as Powell’s replacement, though Warsh’s confirmation has stalled because key Republican senators oppose the DOJ investigation. Powell’s term as chair ends May 15, and while he could remain as a Fed governor until 2028, he indicated he hasn’t yet decided whether to do so.

Despite uncertainties, Powell maintained a largely optimistic economic outlook. “The U.S. economy has been doing really well through a lot of challenges,” he said. “It’s been amazing to see.” He noted the economy has weathered numerous shocks—including tariffs, previous rate hikes, and pandemic aftermath—without falling into recession.

In the Fed’s quarterly projections, officials modestly raised their inflation forecast to 2.7% by year-end, slightly improved their growth outlook, and expect unemployment to remain at 4.4%. Tim Duy, chief economist at SGH Macro, characterized these forecasts as “stale,” suggesting they don’t fully account for the Iran war’s potential impacts.

The Fed’s decision-making is complicated by recent economic data presenting mixed signals. Nationwide gas prices have surged to $3.84 per gallon, up 92 cents from a month ago, which will push headline inflation higher in March. Meanwhile, employers shed 92,000 jobs in February, an unexpectedly weak performance after January’s gain of 130,000, with unemployment ticking up to 4.4%.

One Fed official, Trump appointee Stephen Miran, dissented in favor of a quarter-point rate cut, highlighting divisions within the central bank about the appropriate policy path amid these economic crosscurrents.