The Federal Reserve's Two-Day Policy Meeting Starts Today. Here's What You Need to Know

Key Takeaways

• The Federal Reserve is expected to keep interest rates unchanged this week amid uncertainty caused by the Iran war.
• Analysts predict the Fed will adopt a cautious, wait-and-see approach to monitor potential oil market disruptions and their economic impact.

The Federal Reserve will likely keep interest rates unchanged this week, but analysts will watch for signs that the Iran war will push the Fed to the sidelines for months to come.

It’s a scenario that markets increasingly expect, with the majority of traders still believing the Fed will cut rates, but not until October or December. Some even anticipate the war will cause the Fed to leave its rate untouched all year.

Fed Chair Jerome Powell, during his press conference at 2:30 p.m. ET on Wednesday, may not give markets firm guidance. Instead, analysts expect him to adopt a wait-and-see tone, as the Fed monitors whether oil market disruptions will be temporary or longer-lasting.

Why This Matters

Oil shocks from geopolitical conflicts can reignite inflation and delay interest rate cuts. That directly affects borrowing costs, markets, and economic growth for consumers and investors.

If it’s the latter, that could lead to the Fed’s worst-case scenario—stagflation, when prices are spiraling upward while the economy stagnates. That could force the Fed to try to arrest inflation by keeping interest rates high, even if that pushes up unemployment.

“The Fed was going to move more cautiously anyway this year,” wrote Michael Gregory, deputy chief economist at BMO. “And now, against the background of mounting stagflation risk and economic policy uncertainty, the caution flag is waving more vigorously.”

Powell’s job is “not getting any easier” as he prepares to hand over the reins, wrote Tom Porcelli, chief economist at Wells Fargo.

The Iran war uncertainty could weaken a job market that is “lukewarm and still muddling along,” he wrote. But it could also rekindle inflation, he wrote, which hasn’t yet returned to the Fed’s 2% target after rising sharply during the pandemic.

“Higher inflation and a weaker labor market is the FOMC’s worst nightmare as it puts the dual mandate in tension,” Porcelli wrote.

Rate Cuts Pushed Out

The Fed doesn’t know how long the conflict will last, but reporters are sure to ask Powell how the central bank may respond to different scenarios.

In the last shock to energy markets, Russia’s 2022 invasion of Ukraine, the Fed raised rates aggressively in a sharp pivot from pandemic-era rates of effectively 0%.

There is little chance of rate hikes this year, economists say. But it’s a scenario that investors are toying with, something that was “almost unthinkable two weeks ago,” wrote Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

Instead, the question is whether the Fed will turn hawkish by keeping rates at 3.5% to 3.75% all year, rather than cutting them as many expected before the war.

Traders see a 68% probability that the Fed will cut interest rates this year, down from 97% a month ago, according to the CME Group’s FedWatch tool, which uses futures markets pricing to gauge Fed policy views. Traders now see a rate cut in October or December as more likely, rather than earlier in the year.

Forecast Hints

Some hints may come in Fed officials’ quarterly forecasts. Analysts expect the median Fed official to still pencil in one cut for 2026, the same as December.

A shift toward zero cuts would be a hawkish surprise, however.

“The risk to markets will be if more FOMC members pencil out cuts altogether,” wrote Oscar Munoz, chief U.S. macro strategist at TD Securities.

Munoz and other analysts see that as unlikely, since the fallout of the war remains unclear and recent data give Fed officials “little reason to change their views from December.”

In any case, analysts see the Fed’s forecasts even more penciled in than usual.

“There is huge uncertainty over how long and how intense the conflict and the disruption will be, so the Fed will have little conviction in their forecasts,” wrote James Knightley, chief international economist at the Dutch bank ING.

Hawks Versus Doves

The Fed’s decision to keep rates flat is unlikely to be unanimous, with analysts expecting at least two votes for rate cuts.

Those votes are likely to come from President Donald Trump’s appointees to the Fed, who’ve generally been more aligned with his view that rates should be lower.

Fed Governor Stephen Miran has dissented at every Fed meeting since joining in September—and is once again likely to favor cutting rates.

Analysts expect Fed Governor Chris Waller, who also voted for cutting rates in January, to dissent again. Waller has argued jobs growth has been “very weak,” a sign that the Fed’s policies are too tight.

The hawks at the Fed, who’ve argued against rate cuts this year, are likely to come out ahead. But one question to watch is whether they’ll continue to convince Fed officials on the fence the rest of the year, including when Warsh takes over for Powell.

“With inflation entering its sixth year and counting above 2%, there are signs some of the Committee’s hawks are digging in amid yet another inflationary shock,” Wells Fargo’s Porcelli wrote.

Do you have a news tip for Investopedia reporters? Please email us at

[email protected]