Federal Reserve holds interest rates steady at 3.5%-3.75% amid Iran war uncertainty

The Federal Reserve held its benchmark interest rate unchanged in the 3.5% to 3.75% range at its latest meeting, pausing any further adjustments while it waits to see how the Iran conflict reshapes the energy market and the broader economy. The decision was unanimous among voting members of the Federal Open Market Committee. It is the second consecutive hold after the Fed cut rates twice in late 2025.

The reasoning is straightforward but uncomfortable. Inflation has not returned to the Fed's 2% target. The Iran-related energy shock has pushed oil above $118 per barrel, which feeds directly into transportation costs, manufacturing input prices, and eventually consumer goods. At the same time, job growth has slowed noticeably, with nonfarm payrolls averaging 112,000 per month over the past three months compared to 185,000 in the same period a year earlier. Cutting rates into rising inflation would be difficult to justify. Raising them into a slowing labour market would risk tipping the economy into a contraction.

What the updated economic projections show

The FOMC released its updated Summary of Economic Projections alongside the rate decision. Fed officials now expect GDP growth of 2.4% for 2026, down from the 2.6% projected at the December meeting. The median inflation projection for 2026 has been revised upward to 2.7%, compared to 2.4% in December. That revision reflects the energy price shock working its way through the economy rather than any underlying change in domestic demand conditions.

The dot plot, which shows where individual FOMC members expect rates to be at the end of each year, now shows a median projection of just one rate cut in 2026. In December, the median projection was two cuts. Six of the nineteen participants pencilled in zero cuts for the year, up from three participants in December. That shift tells you more about how the committee is thinking than the official statement language does.

How the Iran war is driving the Fed's calculus

The Iran conflict has introduced a specific kind of uncertainty that central banks struggle with: an external supply shock that raises prices without stimulating demand. When oil is expensive because the global economy is growing fast and consuming more, higher rates are a sensible tool because they cool demand. When oil is expensive because a war is disrupting supply, raising rates does not make oil cheaper. It just slows the economy on top of the energy shock.

The Fed faced a similar situation in 2022 when Russia's invasion of Ukraine pushed energy and food prices higher. In that case, the committee chose to raise rates aggressively anyway because underlying inflation was already running well above target. The current situation is more contained. Core PCE inflation, which strips out food and energy, came in at 2.5% in February 2026. That gives the Fed room to hold rather than hike, which is what it chose to do.

Powell on Fed independence and political pressure

Chair Jerome Powell addressed questions about the Fed's independence directly at the post-meeting press conference. The context is that President Trump has publicly criticised the Fed multiple times in recent months, arguing that rates should be cut immediately to offset the economic drag from the Iran conflict and to support his administration's fiscal agenda. Powell stated that the Fed would continue to make decisions based on its dual mandate of price stability and maximum employment, and that he was confident the institution would work through its independence challenges with transparency.

That phrasing, working through its independence challenges, was notably careful. Powell did not deny that there are challenges. He framed transparency as the tool for managing them. The Fed publishes its meeting minutes, releases the dot plot, and holds quarterly press conferences specifically to demonstrate that its decisions follow an analytical process rather than political instruction. Whether that transparency is sufficient protection against sustained executive pressure is a question that legal scholars and former Fed officials have been debating openly since early 2025.

What the hold means for borrowers and markets

For anyone carrying a variable rate mortgage, a credit card balance, or a business line of credit, the hold means borrowing costs stay where they are for at least another six weeks until the next FOMC meeting on May 6-7. The 30-year fixed mortgage rate was averaging 7.1% in the week before the decision, according to Freddie Mac's weekly survey. That rate has been above 7% for most of the past twelve months, and the single cut now projected for 2026 is unlikely to move it meaningfully.

Equity markets reacted modestly to the decision, with the S&P 500 closing down 0.4% on the day. The 10-year Treasury yield rose 6 basis points to 4.52% after the dot plot showed fewer cuts than some traders had priced in. That yield movement matters because it directly influences mortgage rates, corporate borrowing costs, and the discount rate that investors use to value future earnings.

The next scheduled FOMC meeting is May 6-7. Between now and then, the committee will receive two more monthly jobs reports, one more PCE inflation reading, and whatever the Iran conflict produces in terms of additional energy price movement. If oil stabilises below $110 and core inflation stays flat, the argument for a June cut becomes more defensible. If oil stays above $115 and inflation ticks higher, the single-cut projection for 2026 may itself look optimistic by the summer.