The Federal Reserve opted to leave its policy rate unchanged amid growing unease that a spike in energy prices could feed inflation and jeopardize anticipated rate cuts. In a fresh economic outlook released on Wednesday, the Fed raised its inflation estimates for this year and 2027 compared with previous views in December. But its projections for the fed funds rate through 2028 remained the same, including one potential rate cut by the end of this year. This suggests that a slowdown in hiring was still top of mind for officials, while the oil shock could prove to be short lived. Oil’s rise will push up near-term inflation, but it is “too soon to know the scope and duration of the potential effects on the economy,” Fed Chair Jay Powell said in a press conference.

Higher energy costs could pose a threat to consumer spending and economic activity overall. U.S. gasoline prices averaged $3.72 per gallon as of March 16, up about 66 cents from a year earlier, based on data from the Energy Information Administration. The central bank expects 2.4% GDP growth in 2026, slightly higher than its prior 2.3% forecast, which Powell attributed to increasing confidence in productivity gains. Meanwhile, with oil prices elevated, market participants have been pricing in the potential for hotter inflation and a more cautious approach to rate cuts this year, based on interest rate futures tracked by the CME Group’s FedWatch Tool. The next policy meeting will take place in April, possibly the final confab before Powell concludes his tenure as Fed chair. Powell, who told reporters on Wednesday that he has not decided whether he will resign from the Board of Governors, would continue to lead the Fed if the Senate does not vote on the nomination of Kevin Warsh in time.

Daleep Singh, Vice Chair and Chief Global Economist at PGIM, revisits the outlook for the U.S. economy and monetary policy given the most recent developments in the war.