Federal Reserve Left Interest Rates Unchanged as Iran War Continues Indefinitely

The Federal Reserve decided to leave interest rates as is on Wednesday, as the Iran war sends oil prices soaring and clouds the central bank’s goal of lowering rates this year.

“The implications of developments in the Middle East for the U.S. economy are uncertain,” the Federal Reserve wrote in a statement announcing its decision on Wednesday.

The Federal Reserve maintained rates at 3.5% to 3.75%. Despite economic activity “expanding at a solid pace,” the Fed cited low jobs gains and “somewhat elevated” inflation in its decision.

The decision was made in an 11 to 1 vote, with Stephen Miran dissenting. Miran, an ally of Trump’s, wanted to lower rates.

The economic fallout of the war poses a challenge to the Fed’s aim to lower interest rates and the Trump administration’s messaging on affordability.

Iran has attacked oil tankers in the Strait of Hormuz — through which around 20% of the world’s oil supply transits — and brought most shipping traffic to a halt. American consumers are feeling the squeeze, with average gas prices in the U.S. up by 92 cents over the last month, according to AAA.

How the Iran war ultimately affects Fed interest rate decisions in 2026 will come down to the duration of the conflict, economist Jared Bernstein said. The Fed can “look through” a shock to oil prices during a four- to six-week war, but monthslong hostilities will significantly disrupt oil supply chains.

“The difference between the short term and the longer term, or short duration and longer duration, is the absence of snapping back, and so you’re stuck with some of these higher inflation, slower growth dynamics for a longer time,” said Bernstein, who served as the chair of the White House Council of Economic Advisers during the Biden administration.

President Donald Trump and his administration officials have made conflicting comments on when the war will end, making the Fed’s timeline to lower rates unclear.

The Fed voted in January to hold rates steady due in part to high inflation and “elevated” uncertainty about the future of the economy, despite pressure from the president to slash rates by hundreds of basis points.

Trump’s criticism of Fed Chair Jerome Powell and a Justice Department investigation into the Fed’s multibillion-dollar building renovation have raised concerns for the central bank’s independence. Powell said in January that the criminal probe amounts to political pressure to lower rates.

James Boasberg, chief judge of the U.S. District Court for the District of Columbia, threw out DOJ subpoenas in the probe last week, writing that their purpose appeared to be to “harass and pressure Powell either to yield to the President or to resign and make way for a Fed Chair who will.”

Following the ruling, Sen. Thom Tillis said he would keep his promise to block the confirmation process of Kevin Warsh as Fed chair until the Justice Department closes its probe.

“This ruling confirms just how weak and frivolous the criminal investigation of Chairman Powell is and it is nothing more than a failed attack on Fed independence,” Tillis wrote on X. “Appealing the ruling will only delay the confirmation of Kevin Warsh as the next Fed Chair.”