Fed holds rates steady, still projects one rate cut in 2026

Jerome Powell’s term as chair expires in May and Trump has nominated a former Fed governor, Kevin Warsh, to replace him. Photo by Brendan SMIALOWSKI/AFP via Getty Images

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Federal Reserve officials left interest rates unchanged and continued to expect one rate cut this year as they acknowledged increased uncertainty due to war in the Middle East.

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“The implications of developments in the Middle East for the United States economy are uncertain,” officials said Wednesday in a post-meeting statement. “The committee is attentive to the risks to both sides of its dual mandate.”

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The Federal Open Market Committee voted 11-1 to hold the benchmark federal funds rate in a range of 3.5 per cent to 3.75 per cent. Governor Stephen Miran dissented, calling for a quarter-point reduction.

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This marks the second straight time officials held rates in place, though the economic backdrop has changed significantly since their last meeting. In January, policymakers signalled growing confidence the unemployment rate was stabilizing. Soon after, several officials sounded intent on holding rates for an extended period to help nudge inflation lower.

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Then came a weak February employment report that cast fresh doubt on the steadiness of the labour market. U.S.-Israeli strikes against Iran that began Feb. 28 have also caused global oil prices to surge, threatening to boost inflation and undermine growth and employment.

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Officials dropped language from their January statement describing the labour market as showing signs of stabilization. In its place, they said the unemployment rate was “little changed in recent months.”

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The S&P 500 remained lower following the decision, while Treasury yields retreated after earlier gains. Fed Chair Jerome Powell is scheduled to hold a press conference at 2:30 p.m. in Washington.

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Investors reacted to the war by pulling back their expectations for rate cuts in 2026, though they still see one reduction by the end of the year, according to pricing in federal funds futures. President Donald Trump on Monday called for an immediate rate cut.

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In a fresh set of rate projections, officials continued to expect one quarter-point rate cut in 2026 and one in 2027. No policymakers indicated a preference to raise rates this year.

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In their updated economic forecasts, policymakers slightly upgraded their outlook for growth in 2026 to 2.4 per cent, from the 2.3 per cent they forecast in December. Their unemployment forecast remained unchanged at 4.4 per cent for the end of 2026.

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Officials also raised their outlook for 2026 inflation to 2.7 per cent from 2.4 per cent. Notably, they saw the core measure – which excludes volatile food and energy categories – also rising to 2.7 per cent.

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Central bankers typically don’t raise rates when energy prices jump because the impact on inflation is temporary. But that approach hinges on the public continuing to expect inflation will settle around the Fed’s two per cent goal over the long term. After five years of elevated inflation, some policymakers worry that expectations could creep up, though most survey and market-based measures remain in check.