Fed warns Middle East tensions could shake markets as it holds rates

US equities held steady on Wednesday after the Federal Reserve left interest rates unchanged, signaling caution amid persistent inflation and growing geopolitical risks in the Middle East.
The Fed maintained its target range for the federal funds rate at 3.50%–3.75%, in line with market expectations. Fed Chair Jerome Powell emphasized that the central bank would take a cautious, data-driven approach while assessing the economic impact of geopolitical developments.
The decision was not unanimous. Governor Stephen Miran dissented, advocating for an immediate rate cut, highlighting a degree of division within the committee over the appropriate policy path.
The Fed’s updated Summary of Economic Projections showed little change to its expected rate trajectory. Officials continue to anticipate one rate cut in 2026 and another in 2027, with the longer-run neutral rate revised slightly higher to 3.125% from 3.000%. Under the new projections, the policy rate is seen at 3.375% in 2026, 3.125% in 2027, and 3.125% in 2028.
Analysts said the Fed’s move reflects a careful balance between maintaining economic growth and managing inflationary pressures.
“The Fed is choosing to look through the fog of conflict, for now,” said Jamie Cox, managing partner at Harris Financial Group. “A dual mandate Federal Reserve is not going to rock the interest rate boat during a supply shock.”
Rising energy costs from Middle East tensions have compounded inflationary pressures. Brent crude has surged nearly 50% since late February, pushing US gasoline prices to their highest levels since 2023. Economists say this rise affects consumer purchasing power and inflation expectations, complicating the Fed’s policy decisions.
“One rate cut is still possible this year, but any easing is expected to be gradual,” Antonio Di Giacomo, senior market analyst at XS.com, noted.
Labor market data signal a moderate slowdown in job creation in some sectors, suggesting an orderly rather than abrupt cooling of the economy.
Jeffrey Roach, chief economist at LPL Financial, added that the Fed removed references to “signs of stabilization” in its statement, reflecting ongoing caution in light of weak Q4 2025 growth and elevated petroleum prices. “The likely productivity boost from AI could help offset slower population growth, shrinking labor force, and persistent services inflation,” Roach said.
Financial markets reacted cautiously, with muted moves in equities, currencies, and commodities. Analysts expect volatility to continue until geopolitical and macroeconomic uncertainty becomes clearer.
The Federal Reserve’s decision underscores a careful strategy: maintain steady rates for now while leaving the door open to potential cuts later this year, with global energy prices and Middle East developments likely to determine the pace and magnitude of future policy adjustments.