A gas station price sign in Houston, Texas, USA [AP Yonhap News]

The U.S. central bank, the Federal Reserve (Fed), held a meeting of the Federal Open Market Committee (FOMC) on the 18th (local time) and decided to keep the benchmark interest rate unchanged. This decision is interpreted as reflecting the views of a majority of committee members who believe it is necessary to wait and see how economic conditions evolve, given the escalating risks of both U.S. economic slowdown and rising inflation due to soaring international oil prices caused by the U.S.-Iran conflict.

Prior to the FOMC's decision on this day, the market had already taken it as a given that the Fed would maintain its benchmark interest rate at the current level of 3.50-3.75% due to the surge in oil prices and increased economic uncertainty stemming from the Iran conflict.

Following the outbreak of the war, shipping through the Strait of Hormuz, through which one-fifth of the world's crude oil sea transportation passes, has been effectively blocked. Consequently, Brent crude, an international oil benchmark, closed at $107 per barrel on this day, a 47% increase from just before the war began.

The rise in oil prices is directly reflected in gasoline prices at the pump, as well as in the cost of various petrochemical products, fertilizers, and transportation fares.

Amid concerns that soaring oil prices could further push up inflation, the personal consumption expenditures (PCE) price index, a key inflation indicator for the Fed, rose 3.1% in January on a core basis, significantly exceeding the Fed's 2% inflation target.

The U.S. Producer Price Index (PPI) in February rose by 0.7% from the previous month, indicating that inflationary pressures in the U.S. were already mounting even before the war.

A gas processing facility complex in Asaluyeh, Iran [AP Yonhap News]

Economic experts predict that if international oil prices remain above $100 per barrel for an extended period, both the U.S. and global economies will suffer a blow to their growth rates.

The U.S. growth rate in the fourth quarter of last year was 0.7% (annualized quarter-over-quarter), a significant slowdown compared to the 4.4% growth in the third quarter.

In February, U.S. non-farm payrolls decreased by 92,000 from the previous month, marking the largest decline since December 2020 (185,000 decrease) in the immediate aftermath of the COVID-19 pandemic. This indicates ongoing concerns about weakening employment in the market.

With growing concerns about a weakening U.S. growth trajectory, a prolonged blockade of the Strait of Hormuz could further increase the risk of a decline in growth rates.

Joseph Stiglitz, a Nobel laureate in Economics and professor at Columbia University, warned that the U.S. economy is facing the risk of stagflation (economic recession amid high inflation) as prices are rising due to tariffs and now war, while growth is slowing.

A tanker passing through the Strait of Hormuz [Reuters Yonhap News]

The current economic environment places monetary policymakers, central banks, in a dilemma.

Raising interest rates to curb inflation could further contract the economy, while lowering interest rates to stimulate growth and employment could accelerate inflation.

The uncertainty surrounding the duration and unfolding of the Middle East conflict also contributes to the Fed's cautious approach to policy changes.

During a press conference following the interest rate freeze, Fed Chairman Jerome Powell stated regarding the impact of the Middle East conflict, "What I want to emphasize is that nobody knows."

The Fed's Summary of Economic Projections (SEP) released on this day maintained the appropriate benchmark interest rate at 3.4% by the end of the year, the same as the December forecast. However, Powell explained that this figure was not the result of committee members writing it with conviction.

He commented on the economic projections, saying, "Committee members wrote it because something had to be written," and added, "We weren't able to have a discussion about the duration or the magnitude of the economic impact."

Financial markets have already significantly raised expectations that the Fed will not be able to cut interest rates in the first half of the year, or even throughout the year.

According to CME's FedWatch, the futures market significantly increased the probability of the Fed holding rates at the current level until June from 38% a month ago to 93% on this day.

The probability of no rate cut by the end of the year, which was only 5% a month ago, rose to 52% on this day.

The probability of a 0.25% interest rate hike by the Fed by June also emerged, reflected at 2%.

Powell stated, "As was the case at our last meeting, the possibility that the next policy action could be a rate hike was discussed at today's meeting. We are not ruling anything out, but the majority of participants do not see a rate hike as the base case."

A trader at the New York Stock Exchange [AFP Yonhap News]

Amid the uncertainty in the economic environment, the FOMC decision on this day was made with the approval of the majority of the 12 voting members, excluding one.

Christopher Waller, a Fed governor who dissented in favor of a rate cut at the January meeting, switched his vote to a hold at this meeting.

The sole dissenting vote was from Governor Stephen Myron, an ally of President Trump and a former economic advisor.

Amid ongoing pressure from President Trump for the Fed to lower interest rates, Myron, who took office in September last year, has consistently dissented, advocating for larger rate cuts at every meeting.

Ahead of the FOMC decision, some had speculated that the internal divisions within the Fed might widen, with Governor Michelle Bowman joining Myron and Waller, who had favored rate cuts in January, in calling for reductions. However, internal divisions appeared to narrow in the face of heightened economic uncertainty amplified by the conflict.

James Bullard, former president of the Federal Reserve Bank of St. Louis, told the Wall Street Journal, "When the underlying inflation metrics are above 3 percent and moving in the wrong direction, voting for a rate cut signals that you're willing to tolerate inflation. It's a choice that's difficult to justify logically."

Nominee for Fed Chairman Kevin Wash [Reuters Yonhap News]

Meanwhile, market participants are also paying attention to when Kevin Wash, the nominee for the next Fed Chairman, will be inaugurated.

As the U.S. Department of Justice remains steadfast in its investigation targeting Chairman Powell regarding the issue of excessive spending on renovations at the Fed headquarters, Senator Tom Tillis (Republican, North Carolina) is maintaining his stance of opposing the confirmation of Wash until the investigation into Powell is resolved.

Given the narrow Republican majority in the Senate Banking Committee, if Tillis maintains his opposition to confirmation, Wash will be unable to receive Senate approval.

While a U.S. court ruled last week to invalidate the Department of Justice's subpoena against Chairman Powell, the Department of Justice has requested the judge to reconsider this decision.

Powell's term as Chairman ends on May 15th. If Wash receives congressional confirmation before this date, the upcoming FOMC meeting on April 28-29 will be the last under Powell's leadership.

However, if the confirmation is delayed, Powell is expected to continue serving as Chairman until the appointment of his successor. Unlike Powell's term as Chairman, his term as a Fed governor extends until January 2028.

In this regard, Powell stated at the press conference that if a successor is not appointed by May 15th, he could temporarily continue to serve as Chairman beyond that date.

"That's what the law requires," he said. "It has happened several times, including for me."

In addition, he stated that he would not resign from his position as a Fed governor while the Department of Justice's investigation into the alleged "excessive spending on Fed headquarters renovations" is ongoing. He made it clear, "I have no intention of stepping down from the Board of Governors until the investigation is concluded transparently and definitively."

This appears to be connected to Powell's existing stance, which views the Department of Justice's investigation as an attempt to infringe upon the Fed's independence. Powell's perception is that maintaining his statutory governor position while the investigation continues serves as both a means of self-protection and a silent resistance against "infringement on the Fed's independence."

However, he was non-committal when asked about whether he would remain a governor after the investigation concludes, stating, "I haven't decided."

Fed Chairman Jerome Powell [AP Yonhap News]