Fed Keeps Rates Steady as Powell Warns Iran Oil Shock Could Boost Inflation in 2026

The Federal Reserve held interest rates steady on Wednesday and raised its 2026 inflation forecast as Chair Jerome Powell warned that surging oil prices from the Iran conflict will keep borrowing costs elevated for households well into the year.

The Federal Open Market Committee (FOMC) voted 11-1 to keep the benchmark federal funds rate at 3.5%-3.75% for the second consecutive meeting. But the real shift came in the central bank's updated economic projections, where officials now expect headline and core inflation to hit 2.7% by the end of 2026, up sharply from the 2.4% projected in December.

Oil Shock Rewrites the Inflation Outlook

The jump in the inflation forecast tracks surging energy costs from the Middle East conflict. Brent crude topped $111 (£83.63) a barrel on Wednesday, up from roughly $70 (£52.74) before the war began on 28 February. AAA data showed the average US petrol price jumped to $3.84 (£2.89) per gallon, up from $2.98 (£2.25) before hostilities started.

Powell told reporters that the central bank hasn't made as much progress on inflation as it had hoped. 'The forecast is that we will be making progress on inflation, not as much as we had hoped, but some progress on inflation,' he said during his press conference.

He made clear that any rate cut depends on whether prices actually fall. 'If we don't see that progress, then you won't see the rate cut,' Powell said.

Sharp Divisions Inside the FOMC

The so-called dot plot revealed deep fractures among policymakers. While the median projection still points to one rate cut in 2026 and another in 2027, seven of 19 FOMC participants now want zero reductions this year. Five others pencilled in cuts of 50 basis points or more, pointing to the widest internal split in years.

Governor Stephen Miran cast the lone dissenting vote, favouring a quarter-point cut. It marked his fifth consecutive dissent since joining the board in September, the longest streak of back-to-back dissents by any Fed official since 2013. Governor Christopher Waller, who sided with Miran at the January meeting, voted to hold this time.

Dow Hits 2026 Low

Experts didn't wait for the dust to settle. The Dow Jones Industrial Average dropped 768 points, or 1.63%, closing at 46,225.15 and hitting its lowest level of the year. The S&P 500 fell 1.36%, and the Nasdaq Composite lost 1.46%.

Losses deepened during Powell's press conference as traders priced in the growing likelihood that rate cuts won't arrive until 2027. The sell-off pushed the Dow below its 200-day moving average for the first time since June 2025, a technical signal that often warns of further drops ahead.

Powell Refuses to Step Down

Powell addressed his own future in direct terms. With his term as chair set to expire in May, he told reporters he won't leave while a Department of Justice investigation into the Fed's headquarters renovation project remains open.

'I have no intention of leaving the board until the investigation is well and truly over, with transparency and finality,' Powell said. He added that if President Donald Trump's nominee to replace him, Kevin Warsh, isn't confirmed by the Senate by May, he would remain as chair on an interim basis.

Senator Thom Tillis has pledged to block Warsh's confirmation in the Senate Banking Committee until the DOJ probe is settled. That means Powell could stay in the role longer than anyone expected.

For households already stretched by rising fuel costs and sticky inflation, the Fed's message was unmistakable. Mortgage rates, credit card bills, and car loan payments aren't coming down any time soon. And with Brent crude above $111 (£83.63), petrol prices climbing, and the Iran conflict showing no signs of ending, the squeeze on family budgets is only getting tighter.