The US Federal Reserve is widely expected to keep interest rates unchanged at its upcoming April 28–29 meeting, as policymakers weigh the economic fallout from a surge in energy prices against signs of resilience in the labour market.
The decision comes at a time when financial markets are recalibrating expectations for rate cuts, while Fed Chair Jerome Powell faces a delicate balancing act between controlling inflation and sustaining growth in an increasingly uncertain global environment.
Markets brace for steady policy stance
The Federal Open Market Committee (FOMC) is expected to maintain the benchmark federal funds rate in the 3.5% to 3.75% range, marking the third consecutive meeting without a change.
The central bank had cut rates by 25 basis points at each of its three meetings late last year, aiming to cushion the economy from a slowing labour market.
Since then, however, the economic landscape has shifted.
The escalation of the Iran war has driven up oil prices sharply, adding inflationary pressure and complicating the Fed’s policy trajectory.
According to data compiled by LSEG, traders are assigning a 99.5% probability that the Fed will remain on hold this month.
Investors will be closely watching the Fed’s communication for clues on how policymakers are interpreting the impact of higher energy costs and whether this alters their longer-term outlook on interest rates.
Oil shock pushes back rate cut expectations
The spike in energy prices has significantly altered market expectations for monetary easing.
Before the conflict intensified in late February, investors had anticipated at least two rate cuts in 2026.
That outlook has now shifted dramatically, with markets pricing in less than one standard 25-basis-point cut by December.
A Reuters poll conducted between April 17 and 21 reflects a similar trend among economists.
Of 103 respondents, 56 expect the Fed to hold rates steady through at least September, compared with nearly 70% who had forecast a cut by that point just a month earlier.
The inflationary impact of higher fuel costs has also weighed on consumer sentiment, which has fallen to record lows.
At the same time, policymakers have become more cautious, with even dovish members acknowledging that inflation remains above target.
Powell’s balancing act comes into focus
Speaking at Harvard University in late March, Fed Chair Jerome Powell emphasised a “wait and see” approach as the central bank assesses the evolving economic situation.
“You’ve got tension between the two objectives,” Powell said, referring to the Fed’s dual mandate of controlling inflation and supporting employment.
Higher interest rates can help curb inflation, but risk slowing economic growth and increasing unemployment.
The US labour market has shown mixed signals in recent months, with the economy losing around 92,000 jobs in February before rebounding with a gain of 178,000 jobs in March.
The unemployment rate stood at 4.3% in March, up from 3.8% two years earlier.
The lagged effect of monetary policy further complicates decision-making, as rate changes typically take months to fully impact the economy.
Resilience offers some cushion
Despite rising inflation risks, some indicators suggest the economy remains relatively stable.
Headline consumer prices rose 0.9% in March, driven largely by higher gasoline costs, marking the biggest monthly increase since 2022.
However, core inflation, which excludes volatile food and energy prices, rose a more modest 0.2%.
Michael Feroli, chief US economist at JP Morgan, said this provides some reassurance.
“This gives us a little more confidence that economic growth can weather the ongoing energy price shock without too much enduring damage,” he noted, adding that the April meeting should be “an easy call” for the Fed to stay on hold.
Marvin Loh, senior global macro strategist at State Street, also highlighted the relative support this stance provides.
“The Fed being on hold…is somewhat supportive, versus other central banks that are expected to hike in the next couple of meetings,” he said in a Reuters report.
“So it … provides a little bit of a tailwind for US assets.”
Focus shifts to guidance and leadership uncertainty
While the policy decision itself appears largely settled, attention is likely to centre on forward guidance.
Analysts say the key question is whether the Fed’s messaging prompts markets to adjust expectations for future meetings.
Elmar Voelker of LBBW said the potential for major shifts in expectations at this meeting is limited, with investors already looking ahead to June, when updated economic projections will be released.
The meeting also comes amid uncertainty over leadership at the central bank.
Powell’s term as chair is set to end on May 15, and his potential successor, Kevin Warsh, is awaiting confirmation.
However, political tensions surrounding the process could delay the transition.
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