3 reasons the Federal Reserve’s interest rate pause is worrying investors

The ongoing Iran war has created a fog of uncertainty around the U.S. economy, making it difficult for the Federal Reserve to get a clear view of what lies ahead. This uncertainty was highlighted during a recent press conference where Fed Chair Jerome Powell emphasized the mounting risks posed by the escalating violence in the Middle East.

Investors were rattled by the Fed’s decision to hold interest rates steady, as Powell repeatedly mentioned the uncertainties surrounding the Iran conflict. This led to a drop in stock prices, with markets continuing to slide in the following days. Heather Long, chief economist at Navy Federal Credit Union, described the Fed as being “frozen” in response to the heightened risks caused by the Iran war.

One of the key concerns for the Fed is the impact of the conflict on the global oil supply, with about 20% of the world’s oil passing through the Strait of Hormuz in the Persian Gulf. The strait has been effectively paralyzed by the war, adding another layer of uncertainty to the economic outlook.

During the press conference, Powell used phrases like “we don’t know” and “wait-and-see” multiple times, indicating the Fed’s reluctance to make any preemptive adjustments to monetary policy. The Fed’s latest Summary of Economic Projections also showed that officials expect slightly higher inflation in 2026 compared to previous forecasts, but Powell expressed caution about the outlook given the uncertainties surrounding oil and gas prices.

The uncertainty surrounding the Iran war has also raised questions about the possibility of rate cuts by the Fed this year. Prior to the meeting, there were expectations of one or two rate cuts in 2026, but Powell’s remarks suggest that the Fed may hold off on any rate cuts for now. This shift in expectations is reflected in the CME FedWatch tool, which now shows a 75% probability of no rate cuts this year.

The job market is another area of concern for the Fed, with Powell noting that while the unemployment rate remains low at 4.4%, job creation has stalled. The recent loss of 92,000 jobs in February came as a surprise to economists and raised further concerns about the health of the labor market.

Overall, the Fed’s outlook is clouded by the uncertainties surrounding the Iran war, making it difficult for policymakers to make clear decisions about the future direction of monetary policy. The ongoing conflict has added a new layer of complexity to an already challenging economic environment, leaving investors and economists on edge about what lies ahead.