The Federal Open Market Committee (FOMC) yesterday voted 11-1 to maintain the benchmark federal funds rate in a range between 3.5%-3.75%, its lowest rate since November 2022. This marked the Fed’s second consecutive hold in 2026.
Crude Oil prices have been soaring due the Iran war, which has raised fear that inflation will heat up while growth will weaken, a recipe for stagflation. The policy statement took note of the war, saying that its impact remains unclear and uncertainty over the economy remains high.
Powell Says War will Increase Inflation
At his press conference, Powell said that the Fed was not making as much progress in bringing done inflation as it had hoped. However, he dismissed fears of stagflation, stating that he would reserve that term for a “much more serious set of circumstances”.
Powell warned that surging oil prices due to the Iran war are expected to increase inflation in the near term, adding that “it is too soon to know the scope and duration of the potential effects on the economy, The Fed’s economic forecast projected higher inflation than previous estimates but also stronger growth, which Powell explained was due to productivity gains. On the positive side, Powell said that US economy was in “good shape.”
FOMC officials indicated that they still expect to cut rates once in 2026, unchanged from the December forecast. This means that policymakers expect the spike in energy prices due to the Iran war to have a transitory effect on inflation and the US economy.
US Dollar Steady, Stock Market Slides after Rate Decision
The US Dollar is showing little reaction to the Fed’s decision to hold rate, and is steady against the majors on Thursday, with the exception of the USD/JPY currency pair. The yen has climbed 0.46% on Thursday and is trading at 159.12.
The US major averages fell sharply on Wednesday in response to Powell saying that the Fed was not making as much progress in bringing done inflation as it had hoped. Investors are jittery about the huge rise in oil prices and the Iran war has taken the US stock market on a roller-coaster ride.
The S&P 500 Index declined by 91.39 points (1.36%) and closed the day at 6,624.70.
The Nasdaq 100 Index dropped by 327.11points (1.46%) and closed at 23,857.
We hope you enjoyed reading our analysis of the latest high-impact US economic data. If you’d like to trade with one of the best Forex brokers in the world, check out our list.