The Federal Reserve is preparing to hold interest rates steady on Wednesday for its second straight meeting this year.
Officials are gathering at a particularly tenuous moment. War across the Persian Gulf has pushed energy prices sharply higher, delivering yet another economic shock that has once again upended the outlook for inflation and growth.
The central bank harbored concerns about sticky price pressures and a softening labor market long before the conflict began, as President Trump’s tariffs and immigration restrictions rippled through the economy. The war has compounded those concerns, leaving policymakers in a bind as they chart a course for borrowing costs that seeks to return inflation back to the Fed’s 2 percent target while safeguarding the labor market.
On Wednesday, the Fed will release a new policy statement alongside its rate decision at 2 p.m. in Washington. Jerome H. Powell, the Fed chair, will hold a news conference at 2:30 p.m.
Here is what to watch for:
How many dissents?
Since the middle of last year, the Fed’s rate decisions have been extremely divisive, reflecting the high degree of uncertainty plaguing the economic outlook and varying perspectives about whether to worry more about inflation or the labor market.
A cohort of officials frequently opposed the central bank’s decision to lower rates by a quarter of a percentage point three times between September and December, citing concerns about sticky price pressures and the Fed’s credibility amid five years of above-target inflation.
Stephen I. Miran, whom Mr. Trump tapped to join the Fed last year, has repeatedly dissented in favor of bigger cuts on the basis that inflation fears were overblown and that the labor market required more support.
At the last meeting in January, when the Fed opted to hold rates steady, Mr. Miran was joined by another governor, Christopher J. Waller, who was once under consideration to replace Mr. Powell as chair when his term ends in May.
Before the war with Iran escalated, Mr. Waller stipulated that he would support a cut at the March meeting if the labor market continued to show signs of deterioration. After an unexpectedly strong month of job gains in January, February’s jobs report showed employers shedding 92,000 positions and the unemployment rate ticking up to 4.4 percent.
Economists and former policymakers warn that an oil supply shock is likely to harden divisions inside the Fed, potentially leading to as many as three governors voting for a cut. That could include Michelle W. Bowman, whom Mr. Trump appointed as vice chair for supervision last year.
Dissenters are likely to cite the fact that higher oil prices tend to lead to reduced consumer spending and slower growth, raising the risk of a recession.
Cuts still in play?
The Fed will release a new set of economic projections alongside its rate decision on Wednesday, providing a window into how officials are thinking about the scope for cuts this year.
Policymakers last submitted forecasts in December, with most signaling support for one quarter-point reduction in 2026. Some officials at the time appeared skeptical of the need for further reductions. Seven of the 19 policymakers forecast no cuts at all. Eight projected rates falling by half a percentage point.
Economists are bracing for the possibility that officials scale back their expectations for cuts, including potentially signaling that the Fed plans to stay on hold for the remainder of the year. That would most likely be accompanied by a shift higher in projections for inflation, which the Fed is struggling to return to its 2 percent target.
Justifying cuts will be hard to do so long as there is minimal progress toward that goal. Higher energy prices stemming from the war risk stalling it even further.
Moreover, most officials believe that rates at the current level of 3.5 percent to 3.75 percent are only marginally weighing on the economy, making it even harder to support cuts absent a material weakening of the labor market.
Mr. Powell is likely to face a barrage of questions about how the war has upended the Fed’s outlook and whether the current circumstances make cuts more or less likely.
When will Powell leave?
The Fed’s outlook is further muddied by a major leadership change that is set to take place in the coming months.
Mr. Powell’s term as chair is scheduled to end on May 15, making this week’s meeting his second to last in the top job. He could remain at the Fed, however, if he serves out his term as a governor, which ends in 2028.
Mr. Trump has tapped Kevin M. Warsh, a former Fed governor, to take over as chair, but his path to confirmation by the Senate is riddled with roadblocks.
On Friday, the Justice Department vowed to appeal a ruling by a federal judge who sought to scupper a criminal investigation that had been launched against Mr. Powell and the Fed over renovations at the central bank’s headquarters in Washington.
Top members of the powerful Senate Banking Committee, which oversees the Fed, said they would block the president’s nominees for the central bank so long as the investigation was ongoing. Mr. Powell has demurred from disclosing whether he will stay on as a governor, but the investigation has no doubt shaped his thinking.
At the last news conference in January, Mr. Powell rebuffed questions about his future at the Fed. The recent ruling, however, has shifted the issue back into focus.
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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