The Federal Open Market Committee (FOMC) held interest rates steady on Wednesday, keeping its target range at 3.5 to 3.75 percent. Chair Jerome Powell offered a sober but familiar assessment: the economy is expanding, the labor market is stable, and inflation remains “somewhat elevated.” A new wrinkle — supply disruptions in the Middle East — has joined tariffs as the latest explanation for why prices aren’t behaving.
But the real story of this meeting isn’t what the FOMC did. It’s what its members’ projections reveal about their willingness to tolerate above-target inflation indefinitely.
Start with the numbers. The updated Summary of Economic Projections puts the median FOMC member’s PCE inflation projection at 2.7 percent for 2026. Back in December, the median member projected prices would rise just 2.4 percent this year. The median member’s projection for core PCE inflation in 2026 also rose, from 2.5 to 2.7 percent. These are not minor revisions. In the space of three months, FOMC members have concluded that inflation will run meaningfully hotter this year than they had previously thought.
And yet, the path for rate cuts did not change at all. The median projection for the federal funds rate remains at 3.4 percent at year-end and 3.1 percent at the end of 2027. The FOMC saw more inflation coming and decided it required no change in policy. This is a remarkable position for a central bank that has spent the last four years insisting it would bring inflation back down to 2 percent.
The latest revision might feel familiar. Exactly one year ago, at its March 2025 meeting, the median FOMC member revised up their 2025 projection for PCE inflation from 2.5 to 2.7 percent while continuing to project 50 basis points worth of rate cuts before year’s end. Then, as now, the FOMC projected higher inflation but saw no need to project a higher rate path to curb it.
At some point, this stops looking like data dependence and starts looking like a central bank that has quietly accepted above-target inflation.
Powell’s explanation rests on a specific diagnosis. Elevated inflation, he said, “largely reflect[s] inflation in the goods sector, which has been boosted by the effects of tariffs.” Rising near-term inflation expectations, meanwhile, are driven by “the substantial rise in oil prices caused by supply disruptions in the Middle East.” In other words, higher inflation is due to supply disruption, not excessive spending in the economy.
If that’s right, patience is appropriate: the price-level effects of supply disruptions will soon pass, and the Fed should wait them out. But there are reasons to doubt this diagnosis.
The Fed has been attributing above-target inflation to transitory, non-monetary factors for more than a year now — first tariffs, then government shutdowns disrupting data, now Middle East oil shocks. The specific explanations keep changing, the general conclusion remains the same: inflation remains above target, but it’s not the Fed’s fault.
Given the string of revisions to their inflation projections, FOMC members should consider the possibility that the problem isn’t a sequence of unfortunate supply shocks, but persistent excess demand in the economy.
Ironically, the latter view would appear to be more consistent with their growth projections. The median FOMC member now projects 2.4 percent real GDP growth in 2026, up from 2.3 percent in December. For 2027, the median projection jumped from 2.0 to 2.3 percent. An adverse supply disruption temporarily raises inflation while reducing real GDP growth. Excess demand, in contrast, would increase both inflation and real output growth.
At the post-meeting press conference, Powell acknowledged that consumer spending is “resilient.” The labor market tells a more nuanced story.
Unemployment held at 4.4 percent in February and has been stable since last summer. Job gains are low, but that partly reflects shrinking labor supply — less immigration and lower participation — rather than collapsing demand. Powell described a labor market that has “stabilized,” which is a welcome development after the softening seen last year. But a stable labor market alongside elevated inflation is not a case for further easing. If anything, it raises the question of whether the current stance of monetary policy is restrictive at all.
Chair Powell insists the Fed’s current rate is “within a range of plausible estimates of neutral” — the rate that is neither too restrictive nor too accommodating — and that this stance “should continue to help stabilize the labor market while allowing inflation to resume its downward trend toward two percent.” That’s a testable claim, and so far the data aren’t cooperating.
Inflation isn’t resuming its downward trend. It’s drifting sideways — or, by the FOMC’s own revised projections, getting worse.
The danger is not that the Fed made the wrong call this week. Holding rates steady in the face of genuine geopolitical uncertainty is defensible. The danger is that the Fed has developed a habit of explaining away inflation while preserving the option to cut rates further. The dot plot for the federal funds rate still points to a 25-basis-point rate cut by December and another by the end of next year. Markets aren’t buying it. Fed funds futures point to no cuts until late 2027.
If inflation doesn’t cooperate, the Fed will eventually face a choice it has been deferring: acknowledge that its rate path is inconsistent with its inflation target, or give up on hitting its target.
A central bank’s credibility is not a binary thing. It erodes gradually, one upward revision at a time. Markets will only believe the Fed’s continued assurances for so long before concluding that its projections reveal the plan. Powell is right that monetary policy is “not on a preset course.” But the Fed’s actions tell a different story: it has repeatedly revised inflation upward while keeping its rate path unchanged. That sends a clear message — two percent is an aspiration, not a commitment.
