Fed conundrum

The Federal Reserve held rates steady at 3.50–3.75%, signaling a cautious pause as it weighs rising inflation pressures against softening growth and employment. Updated projections point to slightly stronger GDP and persistently above-target core inflation, even as the labor market shows signs of cooling and recent data have been distorted by one-off shocks like the government shutdown and severe weather. At the same time, productivity gains tied to accelerated capital spending offer a potential offset to inflation over the longer term, but they are not yet strong enough to anchor policy on their own.

The sharp run-up in oil and gasoline prices driven by conflict in Iran has introduced fresh uncertainty, raising the risk that energy costs could reignite broader inflation if tensions persist. For now, policymakers appear inclined toward a wait-and-see stance into the mid-year leadership transition, with markets still expecting gradual cuts over time but recognizing that an extended energy shock could force a hawkish turn instead.