The Federal Reserve is expected to keep interest rates unchanged at its Wednesday meeting as the Iran war creates conflicting economic pressures that complicate the central bank's decision-making process. Rising oil and gas prices from the conflict present Fed officials with competing risks of higher inflation and potential economic weakness.

The spike in energy costs typically would lead the Fed to maintain or raise rates to combat inflation. However, if oil prices remain elevated long enough, they could damage the broader economy and increase unemployment, which would normally prompt rate cuts. This dual threat has left the 12-member Federal Open Market Committee with limited options beyond waiting to assess how the situation develops.

Many economists now expect the Fed's first rate cut this year to occur in September or later, rather than earlier in the year as previously anticipated. The central bank had cut rates three times in the previous year before pausing in January. Mortgage rates have already climbed to 6.1% from 6% last week as markets anticipate that higher inflation will prevent near-term rate reductions.

Inflation data was already showing concerning trends before the Iran conflict began. Core inflation, which excludes food and energy prices, rose 3.1% in January compared to a year earlier, marking the largest increase in more than two years. The Fed had previously forecast inflation would cool to 2.6% by the end of this year, but that projection now appears increasingly difficult to achieve.

The Fed faces additional uncertainty as it prepares to release quarterly economic projections. In December, officials had forecast one rate cut for this year, but maintaining that projection while raising inflation forecasts would create an apparent contradiction. Some economists argue the Fed should increase its core inflation forecast to at least 2.8% by year-end, which would argue against any rate cuts in 2024.

Adding to the complexity is an upcoming leadership transition, as Fed Chair Jerome Powell's term ends May 15. President Donald Trump has nominated Kevin Warsh, a former Fed official, as Powell's replacement, though the nomination faces delays in the Senate due to Republican objections related to a Justice Department investigation of Powell.