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The Federal Reserve, in a decision with one dissent, held the main interest rate steady on Wednesday, flagging the uncertain economic impact from the Iran war as the conflict propelled the price of oil to its highest level in nearly four years.

Fed officials in a median projection forecast one quarter-point reduction in the federal funds rate in 2026, the same as their estimate in December. They expect that their preferred measure of inflation — the personal consumption expenditures price index less volatile food and energy prices — will end 2026 at 2.7%, 0.2 percentage point higher than their December estimate. They raised their forecast for economic growth this year to 2.4% from 2.3% in December. Fed officials also estimate that the unemployment rate will end 2026 at 4.4%, unchanged from their December forecast.

“Uncertainty about the economic outlook remains elevated,” the Federal Open Market Committee said in a statement after a two-day meeting. “The implications of developments in the Middle East for the U.S. economy are uncertain,” the committee said, noting the current challenge of meeting its congressional mandate to ensure stable prices and full employment. 

Fed policymakers, since setting the main interest rate at a range from 3.5% to 3.75%,
have tried for several weeks to finely calibrate borrowing costs to conflicting risks posed by rising unemployment and accelerating inflation.

The central bank’s policy dilemma has worsened this month as the Iran war spurred a jump in energy prices, threatening to increase inflation, slow economic growth and push up unemployment.

Since the renewal of hostilities between Iran and both the U.S. and Israel on Feb. 28, futures for Brent crude oil, the global benchmark, have rocketed by about 48%, from $73 per barrel to $108 per barrel.

Meanwhile, the average price for a gallon of regular gasoline has shot up during the past month by 31%, according to AAA.

Inflation was rising before the U.S. and Israel launched air strikes on Iran and has persisted above the Fed’s 2% target for five years.

So-called core PCE, the central bank’s preferred measure of price pressures, rose 3.1% in January from 3% in December.

Editor’s note: This is a developing story. Read more on our website for live updates.