Fed officials huddle under pressure from Iran war, Trump’s rage

The Federal Reserve will hold its March policy meeting under intense political pressure from President Trump and the economic blowback of the war with Iran.

After keeping borrowing costs steady in January, members of the Fed’s rate-setting committee are set to meet Tuesday and Wednesday while facing a far more tumultuous economy and political climate.

Prices for crude oil, gasoline, natural gas and fertilizer have skyrocketed since the U.S. and Israel began their bombardment of Iran more than two weeks ago, which could both slow the economy and push inflation higher.

“The most important developments since the last FOMC meeting are the start of the war in Iran and the spike in oil prices,” wrote David Mericle, chief U.S. economist at Goldman Sachs global investment research, in an analysis.

“For the Fed, the war increases both the risk that earlier rate cuts will be needed to address labor market softening and the risk that a higher inflation path will delay cuts.”

At the same time, the Trump administration is ramping up its criminal investigation into the Fed — and its rage against Chair Jerome Powell — after suffering a key defeat last week. 

The swirling political and economic storms are unlikely to influence the Fed’s upcoming interest rate decision. The Federal Open Market Committee (FOMC) was expected to keep rates steady again this month, and the odds of a cut dropped sharply as oil prices rose, according to futures markets.

But those dual threats are raising tough questions for the Fed as it navigates the road ahead, along with growing uncertainty about who will be behind the wheel: Powell, or Trump’s nominee to replace him, former Fed board member Kevin Warsh.

“As long as the DOJ’s investigation into the Fed and Powell continues, it is unlikely that the Senate will confirm Mr. Warsh,” wrote Brian Gardner, chief Washington policy strategist at Stifel Investment Bank.

“It is still highly likely that Warsh will be confirmed as Fed Chairman, but the timing of that is uncertain.”

Powell’s term as Fed chair expires in May, and Senate Republicans have voiced strong support for Warsh. But the process of replacing Powell has become ensnarled in Trump’s efforts to push him out of the Fed sooner.

A federal judge struck a major blow to Trump and the Department of Justice (DOJ) last week by blocking subpoenas the department issued against the Fed and Powell in its criminal probe into the central bank.

In an order unsealed in Washington, District Judge James Boasberg blocked the subpoenas of Powell and the Fed board, arguing they were issued for the illegitimate purpose of pressuring the bank and its chair.

The ruling appeared to create a path for Trump and the DOJ to dial back its pressure on the Fed and clear the way for Warsh’s confirmation. 

Sen. Thom Tillis (R-N.C.) had vowed to block any Trump Fed nominee from full Senate consideration until the DOJ probe was resolved and issued a statement encouraging the administration to cut bait.

“We all know how this is going to end, and the D.C. U.S. Attorney’s Office should save itself further embarrassment and move on,” Tillis said.

“Appealing the ruling will only delay the confirmation of Kevin Warsh as the next Fed Chair.”

Powell can stay on the bank’s board through the end of his term as a governor in 2028. The FOMC has also voted to make Powell the acting chair of the panel until his successor is confirmed, giving Trump and the DOJ an additional incentive to end the investigation.

Treasury Secretary Scott Bessent and Senate Republicans had spent weeks looking for an off-ramp to get Warsh confirmed while addressing Trump’s concerns about Powell and the Fed renovations. Several top GOP senators, including Senate Banking Committee Chair Tim Scott (S.C.), who first raised the renovations issue to Powell, have also said they do not believe he or the Fed committed a crime.

The Trump administration, however, intends to appeal the decision while dialing up the rage against Powell in his waning tenure.

“How is this absolutely terrible Federal Reserve Chairman, Jerome ‘Too Late’ Powell, not even allowed to be investigated for the horrible job he does?” Trump wrote in a Sunday night post on Truth Social.

Trump claimed Powell “created an absolute disaster — A money pit, and embarrassment to our Country for the whole World to see!”

“The Contractor on the job, along with Powell, should also be heavily investigated, in that it is impossible for a ‘professional’ to have such enormous Cost Overruns,” he continued.

Fed analysts expected the bank to keep interest rates steady during the final two policy meetings of Powell’s formal term in March and May, and they expected it to issue the first of up to three cuts during Warsh’s first meeting as chair. 

The economic impact of the war in Iran is raising further questions about that timeline, regardless of whether Warsh or Powell is in charge.

The Fed has historically not made major adjustments to interest rates based on what appear to be short-term supply shocks, particularly in the food or energy sectors, where prices are known to be highly volatile.

Steep increases in energy prices also tend to restrain the economy, which could help stave off inflation from rising costs. But the persistence of high inflation after the shocks of both the COVID-19 recession and the Russian invasion of Ukraine has raised questions about how well this logic holds up in a new era.

“Normally, the Fed’s textbook response would prescribe looking through the inflationary impact of an energy supply shock that is short-lived and only temporarily raises headline inflation (and to a lesser extent, perhaps, core) while introducing new downside to the real side,” wrote economists at Monetary Policy Analytics in a research note.

“The prospect of crude oil prices rising in a way that sharply raises gasoline prices, a highly salient good for consumers’ inflation expectations, might give the FOMC more hesitation about signaling any inclination toward near-term easing.”

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