The Fed will almost certainly hold its meeting next week - here's what's still up in the air

The Federal Reserve is widely expected to keep its key interest rate on hold at a range of 3.5% to 3.75% at the end of its two-day meeting on Wednesday.
Policymakers will release their quarterly economic forecasts, showing how they expect inflation, economic growth, and other economic metrics to fare as a result of the Iran war.
The Fed has long been caught between the need to keep rates high to prevent inflation and lower them to stimulate spending and help the labor market.

With Federal Reserve policymakers almost certain to keep their key interest rate unchanged when they decide on monetary policy next week, the main question is how officials think about the Iran war and its impact on inflation.

The Federal Open Market Committee is widely expected to keep the federal funds rate in its current range of 3.5% to 3.75% when it concludes its two-day policy meeting on Wednesday. It will be the second meeting in a row that the central bank has kept rates flat after cutting rates by a quarter in its last three meetings through 2025 to reduce borrowing costs on any type of debt and dampen the labor market.

Financial markets are pricing in a greater than 99% chance the Fed will keep policy flat, according to CME Group’s FedWatch tool, which predicts price movements based on data from mutual fund futures trading.

The Fed has downplayed the prospect of cutting interest rates later this year, as the Iran war has pushed up gas prices and raised concerns about a broader wave of inflation.

Less predictable is a set of economic forecasts that policymakers will release along with the decision, showing their predictions for inflation, unemployment, and changes in the Fed funds rate at upcoming meetings. Those forecasts, along with Fed Chairman Jerome Powell’s post-meeting press conference, could shed light on whether the central bank will cut interest rates this year.

Markets have scaled back their expectations for a rate cut this year, and now consider the most likely scenario of a rate cut in October, compared to last month, when the first cut was expected for June. Businessmen fear that a war in Iran will stoke inflation and depress the labor market, threatening both sides of the Fed’s dual mission mandated by Congress: keeping inflation low and employment high.

Economists said the Fed would be reluctant to take any action in response to the war, given the wide uncertainty about how long it would last and whether the war’s disruption of oil supplies would eventually lead to higher energy prices. Fed officials’ forecasts will most likely acknowledge the fact that the war is likely to boost inflation, at least in the short term, Deutsche Bank economists led by Matthew Luzetti, chief economist, wrote in a commentary.