Fed Holds Rates Steady and Pushes Cuts to 2027 as Iran War Reignites Inflation

The Federal Reserve left interest rates unchanged on Wednesday and pushed any rate reductions into 2027 and 2028, as policymakers weighed the durability of an inflation spike touched off by the U.S. war with Iran. The decision marked the first policy meeting led by Kevin Warsh, who replaced Jerome Powell as chair earlier this year.

The central bank's closely watched "dot plot" — the grid of officials' rate projections — erased an earlier indication of one cut this year. The median projection now points to a federal funds rate of about 3.8% by the end of 2026, roughly 0.16 percentage point above the current level, a signal that a hike is very much on the table rather than the easing markets had once expected.

Officials raised their outlook for inflation in 2026, citing the run-up in energy prices that followed the conflict and the disruption to global oil flows through the Strait of Hormuz. While a tentative agreement to wind down the war has begun to pull crude prices lower, Fed policymakers indicated they want to see hard evidence that price pressures are fading before adjusting policy.

The labor market, meanwhile, has proved surprisingly resilient. Employers added 172,000 jobs in May and the unemployment rate held at 4.3%, giving the committee room to keep policy restrictive without immediate fear of a sharp downturn. That combination — sticky inflation alongside steady hiring — has reinforced the case among hawkish members for patience, or even tightening.

Traders recalibrated quickly. Markets that had largely priced out cuts for 2026 began betting that a quarter-point increase could land as early as October. The shift underscores how dramatically the outlook has changed since the start of the year, when a series of reductions still appeared likely. For households and businesses, the message from Warsh's Fed was blunt: borrowing costs are not coming down soon, and the next move may well be up.