The Federal Reserve kept its benchmark interest rate steady at roughly 3.6% for the second consecutive meeting, citing uncertainty surrounding developments in the Middle East and their impact on the U.S. economy.

In its statement, the central bank said the economic effects of the Iran conflict remain unclear. However, policymakers indicated they still anticipate one rate cut later this year, maintaining projections similar to those released in December.

Officials expect the conflict to push inflation higher in the near term, largely driven by rising energy costs. Gas prices have surged in recent weeks, increasing costs for consumers and businesses, but the Fed appears to view those pressures as temporary.

Policymakers now forecast inflation will reach 2.7% by the end of this year, up from earlier projections. Core inflation, which excludes food and energy and is closely watched by the Fed, is also expected to finish at 2.7%. Over the longer term, inflation is projected to fall to 2.2% by 2027 and return to the Fed’s 2% target in 2028.

At the same time, the Fed maintained a relatively optimistic outlook on the labor market, projecting that unemployment will remain stable through the end of the year. That view contrasts with some private economists who warn that prolonged high energy costs could weaken hiring.

Rising fuel prices are already affecting the broader economy. According to AAA, the national average for gasoline recently climbed to around $3.79 per gallon, up sharply from a month earlier. Higher energy costs can reduce consumer spending in other areas, potentially slowing economic growth.

The Fed faces a difficult balancing act. Higher inflation typically calls for tighter monetary policy, while slowing growth or rising unemployment would push the central bank toward cutting rates to support the economy. A scenario where both inflation and unemployment rise, often referred to as stagflation, presents a significant challenge for policymakers.

The meeting also comes near the end of Jerome Powell’s term as Fed chair, which is set to expire in May. President Donald Trump has nominated Kevin Warsh, a former Fed official, to succeed him, though the confirmation process has faced delays in the Senate.

Recent economic data has added to the uncertainty. Inflation has remained stubbornly elevated, with core prices still above 3% on an annual basis, while job growth has shown signs of slowing. Employers cut 92,000 jobs in February after a stronger gain in January, and the unemployment rate ticked up slightly to 4.4%.

Despite these mixed signals, the Fed’s decision to hold rates steady suggests policymakers are waiting for clearer evidence on how the Iran conflict and energy markets will affect the broader economy before making further moves.