The US Federal Reserve left its key interest rate unchanged on Wednesday and raised its inflation forecast, as policymakers grapple with the economic fallout from the Iran war and the resulting energy crisis.
The rate-setting committee voted unanimously to keep the federal funds rate in a range of 3.5% to 3.75%, marking the fourth consecutive meeting this year without a change.
The decision was the first under new Fed Chair Kevin Warsh, who succeeded Jerome Powell after the latter's term expired in May. Powell remains a member of the Fed's Board of Governors and continues to vote on monetary policy decisions.
The Fed now expects inflation to reach 3.6% this year, up sharply from a forecast of 2.7% issued in March shortly after the outbreak of the Iran war. Inflation is expected to ease to 2.3% next year, slightly above previous projections.
At the same time, the central bank lowered its forecast for US economic growth this year to 2.2% from 2.4%, while leaving its 2027 growth outlook unchanged at 2.3%.
The Fed cut interest rates three times in 2025 amid concerns about the labour market, but has remained on hold at each meeting this year. With inflation running at 4.2%, well above the Fed's 2% target, economists see little prospect of rate cuts in the near term and say further tightening cannot be ruled out.
The inflation outlook has been clouded by the consequences of the Iran war and disruptions to shipping through the Strait of Hormuz, which have constrained global energy supplies and driven up costs for oil, gas and fertilizer.
Official data showed US energy prices in May were 23.5% higher than a year earlier, with petrol prices rising by around 40%.
At the same time, the labour market has remained resilient. US employment increased by 172,000 jobs in May, nearly double economists' expectations, reducing pressure on the Fed to lower borrowing costs.
Warsh, a former Fed governor, has long been regarded as an inflation hawk favouring restrictive monetary policy. However, US media have reported that he has shown openness to lower interest rates, a stance welcomed by President Donald Trump, who has repeatedly called for rate cuts.
The Fed is legally independent and tasked with balancing price stability and maximum employment. Economists have warned that Trump could seek to exert influence over monetary policy through Warsh and push for a looser policy stance despite elevated inflation.
Last week, the European Central Bank raised its benchmark deposit rate by 25 basis points to 2.25%, citing inflationary pressures linked to the Iran war. It was the ECB's first rate increase since September 2023.
