The Federal Reserve’s balancing act is getting harder.
The central bank is expected to hold its benchmark interest rate steady as policymakers weigh signs of a softening labor market against inflationary pressure from the war with Iran. That conflict has disrupted energy markets, sending gasoline and diesel prices sharply higher in recent weeks. While the Fed often treats volatile energy moves as temporary, a sustained diesel spike would lift transportation costs and push up prices for many goods.
Recent Labor Department reports showed U.S. employers cut 92,000 jobs in February and the unemployment rate rose to 4.4%. Job gains for December and January were revised downward, leaving virtually no net job growth over the past six months. Those data complicate the Fed’s dual mandate: encouraging hiring while restraining inflation.
Even before the war-related energy shock, the Fed’s preferred inflation gauge registered 3.1% in January, well above the 2% target. In December, policymakers projected inflation would ease to 2.5% by year-end while unemployment would stay around 4.4%. The new economic shocks have scrambled those forecasts and raised uncertainty about the policy path.
“It’s going to put big, upward pressure on inflation in the near term,” said Michael Pearce, chief U.S. economist for Oxford Economics. He added that higher fuel costs will also restrain consumer spending, complicating the Fed’s outlook.
The Fed’s choices are further complicated by uncertainty over leadership. Chair Jerome Powell’s term ends in May, and President Trump has nominated Kevin Warsh as his successor. Senator Thom Tillis has vowed to block that confirmation until the Justice Department drops a criminal probe into the central bank. A federal judge recently quashed two DOJ subpoenas aimed at the Fed, ruling they were part of an improper harassment campaign to pressure officials to lower rates. Despite the ruling, the Justice Department has not dropped the case.
If Warsh’s confirmation is delayed, Powell—who has faced repeated attacks from the president—could remain Fed chair into the summer and could also stay on the Fed’s board of governors until 2028. Observers say the situation is highly unusual and underscores tensions over the Fed’s independence as policymakers try to navigate competing economic risks.
